U.S. Inflation Cools Off – Dollar at 7-Month Low

Thin Trading on Monday as U.S. Markets Take a Holiday Break

Inflation data released last week showed that the Fed’s aggressive policy is having the wanted effect and that the U.S. economy is starting to simmer down. The Consumer Price Index (year over year) dropped to 6.5% from the previous 7.1%, while the Core version dropped from 6.0% to 5.7%.

According to CME’s FEDWATCH tool, there’s now a 91% chance of a 25-bps rate hike in February, while the probability of a 50-bps hike has dropped to only 9%. The US Dollar is feeling the effects of this shift and has been on the retreat for some time, with the US Dollar Index (DXY) currently trading at a 7-month low.

Key Events for the Week Ahead

Monday the U.S. is celebrating Martin Luther King Jr. Day and markets will be closed, thus volatility will likely be affected. The Eurogroup Meetings take place in Brussels and also the World Economic Forum (WEF) meetings kick off in Davos. The WEF meetings took a break due to the pandemic, which makes their resumption more important. The meetings in Davos will continue throughout the whole week.

Tuesday at 10:00 am GMT the German ZEW Economic Sentiment survey comes out, followed Wednesday at 10:00 am GMT by the Final version of the European CPI and Core CPI. The numbers are expected to come out unchanged and the Final version is the least important, so the impact will probably be low.

Wednesday at 1:30 pm GMT the U.S. Retail Sales and Core Retail Sales come out, alongside the PPI and Core PPI. This cluster of events will likely have a strong impact on the market and especially on the US Dollar pairs.

Thursday at 10:30 am GMT, ECB President Lagarde will participate in a panel discussion at the World Economic Forum. Friday at 10:00 am GMT she will speak again at the same forum and the final event of the week will be a speech delivered by FOMC Member Waller at 6:00 pm GMT, the same day.

Technical Outlook – EUR/USD

The greenback is taking a step back, which is allowing the Euro to capitalize and take the pair higher. It is currently trading at 1.0810, just above the previous resistance at 1.0775 and it is showing a bearish divergence.

The pair is making constant higher highs but the RSI is showing lower highs. This is known as bearish divergence and is a pretty reliable sign that the pair is going to take a dive. However, considering the recent rally and US Dollar weakness, it’s likely that we will see another push higher after this possible retracement.

If the pair drops below 1.0775, we can consider that the pullback is underway and the probability of a drop into 1.0635 – 1.0600 will increase. Another target zone for the mentioned move down is the lower Bollinger Band and the 50-day Moving Average. Just keep in mind that the pair is under bullish pressure, and thus retracements could be short-lived.