1.0500 or 1.1000? The EUR/USD pair stands at a crossroads between two possible scenarios, each of which, as they say, has a right to exist. The path to the 1.10 figure implies further decline in U.S. inflation and a softened stance from the Federal Reserve, against the backdrop of the European Central Bank's tightening rhetoric. These are the key components necessary to guarantee a price spike with 1.1000 as the ultimate target. The second scenario mirrors the first: an unexpected acceleration in U.S. inflation in November, a "moderately hawkish" stance from the Fed, and a cautious position from the ECB. If these conditions are met, selling EUR/USD would cost nothing to make another 250-point jump towards the base of the 5th figure (it's worth noting that over the last two weeks, the pair has dropped more than 300 pips).
In other words, the balance could tilt in either direction. Judging by the general sentiment in the expert community, most analysts lean towards the bearish scenario, considering the recent Non-Farm Payrolls and sufficiently hawkish statements from Fed officials, voiced even before the "blackout period" began. However, in my opinion, the greenback is a bit unstable right now so we can't confirm the continuation of the downward trend in EUR/USD. Much will depend on the dynamics of inflation growth in November.
Several inflation reports are scheduled to be released this week. The most important one would be the Consumer Price Index, which is set to be published on Tuesday, a day before the announcement of the results of the Fed's December meeting. According to most experts, the CPI on a monthly basis is expected to remain at the zero mark (as in the previous month), while on an annual basis, it is projected to decrease to 3.1% (after a three-month increase, the indicator again shows a descending sequential trend). The core index, excluding food and energy prices, is expected to slightly accelerate on a monthly basis (0.3% after 0.2% the previous month) and remain at the October level on a yearly basis (4.0%).
On Wednesday, December 13, a few hours before the Fed's "verdict," we will learn the November value of the Producer Price Index. A minor increase in the PPI is expected on a monthly basis – by 0.1%, following October's decline to -0.5%. However, on an annual basis, the indicator is expected to reach 1.0%. It is important to note that the PPI consistently decreased over 12 months, reaching 0.2% in June this year. But then it started gaining momentum again, registering an uptrend for three months (up to 2.2% in September). In October, the indicator dropped to 1.3%, so if it comes out in November at or below the forecast, it may indicate the possibility of a new downtrend. The core PPI is expected to decrease to 2.3% on an annual basis – the lowest value of the indicator since January 2021.
The next day, on Thursday, the U.S. will release another inflation indicator – the Import Price Index. Experts also expect a downtrend here both on a yearly basis (-1.9%) and on a monthly basis (-0.7%).
The core Personal Consumption Expenditures (PCE) index – one of the key inflation indicators for the Fed– will be published next week (December 22), so let's set that aside for now. However, the aforementioned reports do not bode well for the greenback. Primarily, the focus is on the CPI. The dynamics of this indicator may influence the Fed's position in the context of the December meeting. If the CPI comes out at the forecasted level (let alone in the red zone), representatives of the "dovish wing" of the Fed can more convincingly argue their position. This factor may also impact the Fed's dot plot. It's worth recalling Christopher Waller's recent statement, a member of the Board of Governors, who began discussing the conditions for rate cuts. According to him, the central bank will find it challenging to justify maintaining the status quo if inflation consistently slows down over "three, four, five months."
By the way, after the release of October's inflation, currency strategists at Goldman Sachs adjusted their expectations regarding the timing of the first round of tapering. Previously, they believed that the first Fed rate cut would occur in the fourth quarter of 2024. Now, these expectations have shifted to the third quarter of 2024. Meanwhile, according to the CME FedWatch Tool, the probability of a 25 basis point rate cut at the May meeting currently stands at 49%.
Thus, the inflation releases scheduled for this week may play a crucial role in shaping the Fed's stance (especially regarding the CPI) and in reinforcing/weakening the overall dovish sentiment in the market. Given the high level of uncertainty, it is advisable to maintain a wait-and-see position on the EUR/USD pair – the CPI report could significantly "redraw" the fundamental picture for all dollar pairs.
