The EUR/USD pair hit a new multi-month high on Monday, following Friday's momentum. Such values are primarily due to the dollar weakening across the market.
Key labor market data released on Friday was interpreted against the greenback. Overall, the release came out in the green zone, but with one significant flaw: the payrolls figures fell significantly short of the forecasted values. At the beginning, the dollar strengthened - for example, against the euro, it strengthened to 1.0485. But then traders thought "is the glass half empty or half full". On the one hand, the US unemployment rate was down to 3.5%, and employment growth was above most forecasts. However, one fat "negative" in the form of a wage component crossed out all the "positives" of the release. That's why the pair closed Friday's trading not at the level of the 4th figure and not even at the level of the 5th price level, but at 1.0645. Bulls were also supported by the ISM services PMI, which came out in the red zone, like its "sibling" - the ISM manufacturing PMI. Both indicators remained under the key 50-point mark, reflecting negative trends.
Last week ended not in favor of the dollar for another reason: amid weak and/or contradictory reports, hawkish expectations regarding the pace of further tightening of the Federal Reserve's monetary policy also decreased. According to the CME Group FedWatch Tool, markets are currently pricing in a 75% probability of a 25 basis points Fed rate hike in February. Whereas early Friday (that is, even before the release of Nonfarm and ISM services PMI), the market estimated the probability of a 25-point step at only 57%.
Remember that following the results of the December meeting, the Fed members slowed down the pace of monetary tightening to 50 points, ending the period of 75-point hikes. At the same time, Fed Chairman Jerome Powell said that the central bank will show flexibility in this matter, thereby not ruling out further calibration — both towards a more aggressive approach and in the opposite direction. According to Powell, everything will depend on the values of key indicators, primarily in the field of inflation and the labor market.
Given the dynamics of many indicators (CPI, PCE index, Nonfarm payroll component, ISM prices index), there can be no question of a return to the 75-point rate. The fork consists of two options: either the Fed raises the rate next month by 50 points, or reduces the rate to 25. And judging by the reaction of the market to the December Nonfarm, the scales are beginning to lean towards the second, dovish option.
But take note that under the circumstances, the US consumer price index for December (which will be published on Thursday, January 12) can play the role of a "black swan".
The inflation report would have no practical significance if the event consisted of two options: a return to the 75-point pace or the preservation of the 50-point step. But now the question is different, given the aforementioned data of the CME Group FedWatch Tool. There is now a 25-point scenario on one side of the scale, and a 50-point scenario on the other. And in this scenario, the inflation report may well play a decisive role. If the report is at the forecast level (according to experts, US inflation in December will continue the trends of November, slowing down "on all fronts"), the probability of a 25-point rate hike in February will rise to 80-85%. The same can be said for the red zone. But if the report surprises traders with a "green color", the chances of implementing a 50-point scenario will be about 50/50. This will be quite enough for the dollar to assert itself, allowing bears to conduct another counterattack to the base of the 6th figure.
In the meantime, the pair is storming the resistance level of 1.0750 (the upper line of the Bollinger Bands indicator on the daily chart). And not only because the greenback is weakening. The price is also rising due to the euro, which is kept afloat thanks to Friday's release.
The main data on inflation growth in the eurozone were published on Friday. The release was controversial, but it was still in favor of the single currency. With the general consumer price index slowing down, the core CPI unexpectedly rose to 5.2%, setting another record. Overall inflation slowed down largely due to the energy sector: the growth in energy prices slowed in December to 25.7% from 34.9% in November. However, core inflation continued its ascent, updating all new highs. This suggests that the European Central Bank will remain hawkish – at least in the context of this year's first meeting.
Thus, the fundamental background for the EUR/USD pair contributes to further price growth in the coming days, at least until the US inflation report, which is able to "redraw" the fundamental picture. It would be wise to consider longs once the pair crosses the resistance level of 1.0750 (the upper line of the Bollinger Bands on D1) – as you can see, bulls failed to settle above this target impulsively. If EUR/USD bulls still overcome this price barrier, then the next targets will be 1.0800 and 1.0850.
