Dollar, EUR/USD analysis: FX markets show limited CPI response

Dollar analysis: Greenback gets modest boost on hot inflation
US CPI comes in hotter-than-expected at 3.4% y/y
EUR/USD

All week, investors had been eagerly waiting for today’s CPI report to inject much-needed volatility into the markets. The market was positioned for a positive surprise, and as it turned out, that’s more than what they got. The December inflation report was a little hotter than expected and this caused the dollar to bounce, and equity indices fell in the immediate aftermath of the inflation report. Gold took its time, but it too had drifted into the negative at the time of writing.

Why have FX markets shown subdued reaction post CPI?

The FX market’s somewhat subdued reaction suggests investors were perhaps happy to take profit on their long dollar positions. They clearly still expect rate cuts will come this year, but not sure precisely when. In fact, the odds of a March rate cut remained at around 70%, according to the CME FedWatch tool. Perhaps investors expect inflation to go back down again, so they are just looking past the December inflation report, arguing that weakness in the economy should put downward pressure on prices in the months ahead. Still, the somewhat muted reaction is surprising to say the least.

EUR/USD analysis: Single currency holds between key levels

The dollar’s muted reaction could also be that investors view foreign central banks as being more hawkish than the Fed. For example, the European Central Bank official Isabel Schnabel delivered a hawkish speech to counter recent dovish ECB commentary Schnabel said that “it is too early to discuss rate cuts” and “additional data confirming the disinflationary process” will be required to move from restrictive monetary policy.

Despite the US inflation report coming in hotter, the EUR/USD managed hold well above the 1.09 handle, but also was unable to break the 1.10 barrier earlier in the day. A move outside of this range should trigger follow-up technical buying/selling in that direction.

How strong was US CPI?

In case you missed it, CPI rose 0.3% MoM, ahead of the 0.2% expected, pushing the annual rate up to 3.4% in December from 3.1% in November. A reading of 3.2% was expected. Core CPI rose 3.9% annually versus forecasts of a 3.8% increase. We also had better than expected data from the jobs markets, with jobless claims coming in at 202K, down from 210K in previous week.

Dollar analysis: Dollar index technical levels to watch

Following the CPI data, the Dollar Index was up only 0.3%, reflecting a subdued FX market response. It was turning positive on the week, so perhaps we may see a more profound response later in the day.

The bearish trend is being tested though, and the dollar sellers must step in around these levels if they want to maintain control. The 200-day average could be the next upside target in the event the dollar bulls maintain control over the next couple of session.

However, zooming out a little, larger time frames show lower lows since it peaked in October at 107.35ish. With that in mind, the key resistance zone to watch today is between the 102.45 to 103.00 area, where the DXY was residing at the time of writing. This zone had acted as strong support on a couple of occasions back in August and again in November, before giving way on the back of the Fed’s last policy meeting in mid-December.

Thus, for as long as that 102.45 to 103.00 area holds as resistance today, this should keep a bearish bias on the dollar, else 103.50 where the 2000-day MA comes in could be the next target for the bulls.

So, watch today’s closing prices closely to determine the directional bias for the dollar heading into the final day of the week.

Source for al charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.