The market’s reaction to the previous US inflation data suggests a leak of information or hacking of the system. Will the last month’s situation repeat itself, and how will EURUSD react to the CPI data? Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
The hope for a sixth consecutive CPI slowdown, resulting in a fall to the lowest level since October 2021, has allowed the markets to breathe easy. The S&P 500 has risen in three of the last four trading sessions, allowing the EURUSD to hit a seven-month high. The options market signals a high risk of fluctuations in the broad stock index in both directions by 2%. An impressive figure, although below the 3% from the previous five CPI reports. After the release of the last of them, an incident happened.
Namely, the trading volumes for futures on US Treasury bonds exceeded their average values three times a minute before the release of inflation data. Although the Department of Labor has ruled out the possibility of a data leak, and the Commodity Futures Trading Commission and the Securities and Exchange Commission have shown no signs of concern, traders suspect a hack.
Reaction of stock and bond markets to inflation data
Bloomberg experts expect consumer prices to slow from 7.1% to 6.5%, moving away from June’s 9.1%, which indicates that the peak has been passed. If so, then the Fed does not need to return to the previous rate of monetary restriction. During the current cycle, the central bank raised the federal funds rate by 75 bps four times in a row. After that, in December, the Fed raised the rate by 50 bps and is currently considering a return to the usual +25 bps.
The slowdown in the Fed’s monetary tightening affects the USD. EURUSD has gained 12% since hitting the September bottom. Now euro buyers are waiting for the latest US inflation data to push the pair to 1.1. Nomura expects this level to be reached by the end of January. Deutsche Bank and Morgan Stanley forecast that EURUSD will rise to 1.15 during the year. Societe Generale believes that if it were not for the war in Ukraine, the euro would cost $1.2.
Therefore, Credit Agricole’s statement that the euro looks expensive and should return to $1.05 without a significant change in fundamentals looks like an attempt to put a good face on a bad game. Alas, EURUSD bears are weak now. The market is dominated by bulls dreaming of a new catalyst for the rally.
Weekly EURUSD trading plan
With a lot at stake, namely a 25 bps or 50 bps increase in the federal funds rate in February, expect increased volatility. I do not rule out an upside EURUSD breakout and a subsequent price rebound from the resistances at 1.08 and 1.082 against the backdrop of the implementation of the “buy on rumors, sell on facts” principle. Therefore, it would be unreasonable to partially exit longs formed at the level of 1,069. Make a decision depending on how quickly the market will pass the above levels.
Price chart of EURUSD in real time mode
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