The US Consumer Price Index (CPI), a crucial gauge of inflation, is set to take center stage as its November figures are due for release on Wednesday at 13:30 GMT by the Bureau of Labor Statistics (BLS). Markets are on tenterhooks in anticipation, knowing full well that the outcome could trigger substantial fluctuations in the US Dollar and have a profound influence on the Federal Reserve’s interest rate decisions in the coming months.
What can be expected from this impending CPI data report? Well, as per forecasts, inflation in the US, as measured by the CPI, is likely to see an annual growth rate of 2.7% in November, which represents a slight uptick from the 2.6% reported in the previous month. Meanwhile, the core annual CPI inflation, which excludes the often-volatile food and energy prices, is projected to remain unchanged at 3.3% during the same period. On a monthly basis, both the headline CPI and core CPI are anticipated to increase by 0.3%.
TD Securities analysts, while previewing the October inflation report, offered their insights. They stated, “We look for core inflation to stay largely unchanged in November, registering another firm 0.3% m/m advance. Rising goods prices are expected to explain most of the strength in the series, while slowing housing inflation is likely to provide some relief. On a y/y basis, headline CPI inflation is expected to inch higher to 2.7% while core inflation likely stayed unchanged at 3.3%.”
Federal Reserve Chair Jerome Powell, in his remarks at an event hosted by the New York Times on December 4, shed light on the central bank’s approach to future interest rate adjustments. Given the economy’s stronger-than-anticipated performance this year, the Fed’s stance could be more measured. Powell noted that the economic resilience had surpassed earlier forecasts, enabling the central bank to adopt a more cautious posture as it aims to determine a “neutral” rate policy. He emphasized that “the economy is strong, and it’s stronger than we thought in September,” even though inflation has been running a bit higher than expected. This backdrop is shaping the Fed’s outlook as it gears up for its upcoming meeting on December 17 – 18, which markets had widely expected to result in another rate cut.
When it comes to the potential impact on the EUR/USD exchange rate, there are several factors at play. The incoming Trump administration is anticipated to adopt a stricter stance on immigration, a more relaxed approach to fiscal policy, and reintroduce tariffs on imports from China and Europe. Collectively, these measures could exert upward pressure on inflation, potentially prompting the Fed to pause or even halt its current easing cycle, thereby lending additional support to the US Dollar.
However, considering the gradual cooling of the US labour market conditions and the likelihood of sticky inflation persisting, the November inflation report is not likely to bring about a significant shift in the Fed’s monetary policy stance. Currently, markets are pricing in around an 85% probability that the Fed will reduce rates by 25 basis points in December, according to the CME Group’s FedWatch Tool.
Pablo Piovano, a Senior Analyst at FXStreet, also provided a technical outlook for EUR/USD. He pointed out that the December high of 1.0629 (December 6) serves as the initial resistance, followed by the intermediate 55-day Simple Moving Average (SMA) at 1.0776 and the more significant 200-day SMA at 1.0842. On the downside, if the spot price breaks below the December low of 1.0460, it could open the door for a potential test of the 2024 bottom at 1.0331 (November 22).
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