Today, the EUR/USD rate will be decided by the result of inflation from the eurozone and particularly by the monthly report on the condition of the American job market. The ECB and Fed have likely ended the cycle of interest rate increases. Currently, there are bets on which central bank will be the first to make a move in the opposite direction.
In both the case of the ECB and the Fed, the market has significantly hastened its expectations regarding a cut in rates. The main question for EURUSD today is whether the data will confirm these expectations.
A rise in eurozone inflation for December today should not come as too much of a surprise. It will be a result of the fact that energy prices dramatically dropped in December 2022, and this is where the probable spike in HICP will stem from. Yesterday, we got to know the result for Germany. There, inflation increased from 2.3% to 3.8% (HICP) and from 3.2% to 3.7% (CPI) year on year. Today’s data should not cause the market to significantly revise its expectations. It seems that only the data for January will be more important for the ECB. Many businesses adjust their prices at the beginning of the year. That’s why the next CPI/HICP publication will likely have a greater effect on market volatility, as it will be a kind of starting point. If the decrease in inflation to the target level takes longer, the ECB will probably cut rates later, which would be a positive signal for the euro. Current expectations regarding interest rate cuts may soon require some correction.
The start date of cuts is just as important for the Federal Reserve. In the case of U.S. data, the market observes the job market along with inflation. We know very well that the Fed has a dual mandate and, besides caring about price stability, it also has the task of controlling employment. Today is the first Friday of the month, so traditionally, we will get to know the NFP report. Yesterday’s ADP surprised with a higher result, but that does not at once mean the official data today will also be better. Forecasts point to an employment increase in the non-agricultural sector at the level of 175,000 and a change in unemployment rate from 3.7% to 3.8%. However, a result above 100,000 all the time indicates that the job market is in quite good condition. In my opinion, only a drop below this level could have a more significant impact on market volatility. Either way, worse data at 14:30 will weaken USD. The degree of depreciation will be determined by the size of the negative surprise.
Łukasz Zembik Oanda TMS Brokers
