The EUR/USD tested the resistance level of 1.0700 again and tried to settle in the area of the 7th figure. The bulls made a similar attempt on Friday, but retreated to previous positions. At the beginning of a new trading week that marked the beginning of 2023, the price repeated Friday's round: reaching 1.0710 the pair turned 180 degrees and headed towards the middle of the 6th figure. However, Monday's price movements should be considered through the prism of the "thin" market, since most trading floors of the world are closed as people continue to celebrate the New Year. The main events in the currency market will unfold a little later, starting on Tuesday. By the way, the first more or less significant macro data will also be published on Tuesday.
It is noteworthy that the current week is full of events of fundamental nature. In particular, there will be reports on inflation in Germany and the European region in general, as well as the release of the minutes of the Federal Reserve's December meeting. In addition, the U.S. will release its ISM manufacturing index and key labor market data. Fed officials will also be on the air with Fed Board of Governors member Lisa Cook and Atlanta Fed Chair Rafael Bostic speaking.
This means that we are expecting a rather volatile week, while the current price fluctuations reflect the hesitation of traders, both bulls and bears.
The German inflation growth data will be released on January 3. According to preliminary forecasts, the release will reflect the slowdown in consumer price index growth. The overall CPI should come in at 9% (a down trend for the second month in a row) and the core at 10.7% (a similar downward trajectory here).
German data tend to correlate with Europe-wide data, which will be released on Friday (January 6). Preliminary forecasts also suggest that inflation in the euro area will again show signs of slowing. The general consumer price index for December should come in at 10.0% and the core at 4.9%. And while the inflation figures will still remain at an unacceptably high level for the European Central Bank, the downtrend will clearly be visible. If the aforementioned data come out at the forecasted level (not to mention the red zone), the euro may come under pressure, as a slowdown in inflation growth will strengthen the ECB's dovish stance. Let me remind you that according to ECB President Christine Lagarde, the pace and extent of the central bank's monetary tightening will depend on incoming data, primarily on inflation.
But the US currency is waiting for "its" own data. We should highlight the minutes of the last Fed meeting (to be published on Wednesday, January 4) and the Nonfarm payrolls (Friday, January 6).
The so-called "Fed Minutes" is particularly important to the dollar pairs this time. The conflicting results of the December meeting did not sink the dollar, but they did not allow the greenback to recover. On the one hand, the Fed slowed the pace of interest rate hikes, while on the other hand it revised (upward) the upper limit of the current monetary tightening cycle. Fed Chairman Jerome Powell gave a rather dovish message, admitting a new revision of the final point of raising the rate (downward already), on the other hand, John Williams, head of the New York Fed, said after the meeting that the central bank can go beyond the declared maximum of 5.1%. In the context of such contradictory signals, the published minutes will help tip the scales in one direction, either strengthening the greenback or weakening it.
As for Nonfarm, experts do not expect anything shocking here. The December figures should generally repeat the trajectory of the November ones. The unemployment rate is likely to remain at 3.7% and the number of people employed in the nonfarm payrolls will increase by 210,000 (+263,000 in November). Payrolls should also repeat November's trajectory (+5.0% y/y, 5.1% in November).
The ISM manufacturing index, which will be published on Wednesday, January 4, may put pressure on the greenback: according to preliminary forecasts, this index will remain under the key 50-point level, firstly, and secondly, it will fall to 48.6, thus developing a three-month downtrend.
The aforementioned fundamental factors will determine the mood of the traders in the medium term. Current price fluctuations are now part of the market noise: when there is no information available, the market reacts sharply even to information related to the market.
For example, this morning the dollar strengthened its positions after the pessimistic statements of the IMF head. According to IMF Chief Kristalina Georgieva, in 2023 one third of the global economy will suffer from recession. According to the calculations of the economists of the Fund, global growth will be restrained by the economies of America, China and the EU, which "are slowing down simultaneously". Georgieva predicted that half of the EU will be in recession, but America "may avoid" it.
Amid a blank economic calendar, such pessimistic statements of the IMF head provoked a surge of volatility in the pair, temporarily strengthening the safe-haven dollar. Still, at the moment it would be best to take a wait-and-see attitude on the pair: the aforementioned macro data, the Fed minutes and speeches of the Fed representatives may "redraw" the fundamental picture in a significant way.
