ECB and Fed Policies Diverge Ahead of Inflation Data

EUR/USD Set for Action-Packed Week, Approaching Key Support.

The policies of the European Central Bank and the Federal Reserve are starting to diverge, which could mean that we are set for higher volatility. For now, it looks like the Fed is winning the battle of hawkish comments.

In a speech delivered last Thursday, Fed Chair Jerome Powell said that the struggle with inflation may need additional rate hikes, which was perceived by market participants as hawkish and drove the dollar higher.

On the other hand, European Central Bank (ECB) President Christine Lagarde said Friday that inflation may reach the targeted 2% if the rates are kept high enough for long enough. This made traders believe that the ECB is done hiking and instead plans to delay the cutting.

It looks like we are in for an action-packed week, considering that inflation data is set to come out for both the U.S. and Eurozone economies.

According to CME’s FedWatch tool at the time of writing, there’s an 85.9% probability that the Fed will keep the rate unchanged at the next meeting, on December 13th. The probability of a hike is now 14.1%, up from 9.6% a week before.

Key Data for the Week Ahead

Inflation data for the U.S. will be the first to come out, scheduled for Tuesday at 1:30 pm GMT. The year-on-year Consumer Price Index is expected to drop from 3.7% to 3.3%, while the monthly figure is anticipated to go down to 0.1% from 0.4%. These are quite hefty changes, which could affect the dollar if they materialize.

The U.S. Retail Sales numbers are scheduled for release Wednesday at 1:30 pm GMT, together with the Producer Price Index (PPI) and Core PPI. The figures for all of these indicators are expected to be lower than the previous, which would be a sign that the U.S. economy is starting to slow down.

The Eurozone inflation data will come out Friday at 10:00 am GMT. The biggest change is expected to be in the year-on-year Inflation Rate: from the previous 4.3% to 2.9%. We will have to wait and see how these numbers will affect the single currency but also how the ECB will react.

Technical Outlook – EUR/USD

Although last week was mainly controlled by the US Dollar bulls, price action was slow and the pair crawled lower without momentum. It is currently trading at 1.0690 after reaching a weekly high of 1.0756.

Since the failed break of 1.0500, the pair has been making higher highs and higher lows. It also broke the long-term trend line and the 50-day Moving Average, which shows a bullish bias. If the price descends to the confluence zone created by the support at 1.0635 and the 50 MA, we may see a bounce higher.