U.S. Inflation Near Target as Markets Enter Holiday Mode

EUR/USD Uptrend Faces Pressure as Dollar Bulls Return

U.S. inflation is inching closer to the Fed’s 2.0% target, as shown by last week’s Consumer Price Index (CPI) report, which posted a reading of 2.7%, down from the previous 3.1%. This reignited talks about deeper rate cuts for early next year, but the chances of a January cut are relatively low, at 22% and have not changed much after last week’s CPI release. However, the chances for a March cut are now 46%, up from 41% a week ago, according to the CME FedWatch tool.

With inflation cooling and the job market still on the ropes, we can expect some action from the Federal Reserve, but another cut in January may be too soon. That being said, there’s still one Non-Farm Payrolls (NFP) report scheduled before the January Fed meeting, so things could change after the release.

The winter holidays will weigh on market volatility for the rest of the year. With very few economic releases scheduled, both remaining trading weeks are shortened by major holidays—Christmas and New Year.

Economic Calendar Highlights

This week only has one major release on the calendar: the U.S. Gross Domestic Product (GDP). It is scheduled for Tuesday at 1:30 pm GMT and is expected to show a drop from 3.8% to 3.2%. The GDP was delayed 27 days due to the government shutdown, and it may generate some volatility if the actual number differs from the forecast.

Other releases worth mentioning are the U.S. Consumer Confidence survey, scheduled for Tuesday at 3:00 pm GMT, and the Unemployment Claims scheduled for Wednesday at 1:30 pm GMT. Under normal circumstances, these releases do not create notable moves. Thursday and Friday, banks in many countries of the world will be closed in celebration of Christmas.

Technical Outlook – EUR/USD

Price action will be prone to irregular movement and possibly thin liquidity. This can lead to unpredictable and strong moves or, quite the opposite, a flat price.

The dollar erased some of the previous week’s losses and is now attempting to drag the pair back below the support at 1.1700. This comes after the RSI touched its 70 level, suggesting that the pair is becoming overbought and increasing the chances of a deeper pullback.

A daily close below 1.1700 would increase the chances of an extended move lower, possibly into the 1.1600 area or even into the lower Bollinger band. Keep in mind that end-of-year volatility will most likely weigh on markets.