Will we see a peak in inflation in almost 40 years?
Friday’s inflation reading in the US will undoubtedly be a priority for the US central bank as it approaches its last meeting of the year.
As experienced traders know, market volatility and volume tend to dry up during the holidays in the last couple of weeks of the year, but before we get to that there will be a number of economic releases. high impact over the next ten days. For US-based traders, the proverbial “last hurray” of 2021 will be the Federal Reserve’s monetary policy meeting on Wednesday, but the pre-dinner aperitif before that main course will undoubtedly be Friday’s highly anticipated report on the. November consumer price index (CPI).
While theoretically not the Fed’s preferred measure of inflation (that honor goes to reading basic personal consumption spending), the CPI report is the one that carries the most weight with consumers and , by extension, politicians. In fact, October’s 6.2% CPI reading, a 30-year high, seems to have been the catalyst that prompted Fed Chairman Jerome Powell to become his hawkish pivot in favor of ‘a more aggressive cut, so Friday’s inflation reading will arguably be the best. of mind for the central bank as it approaches its last meeting of the year.
What are traders expecting from the November CPI report?
Unfortunately for frustrated US citizens, the CPI reading is expected to rise further on Friday. As of going to press, traders and economists expect the headline CPI to rise 6.8% year-on-year (0.7% m / m) as the US economy continues to struggle against persistent supply chain shortages and rising labor costs. If it met these expectations, it would be the biggest annual increase in consumer prices since 1982!
Digging into the specifics, there is still relatively little explaining much of the increase in inflation, evidenced by the 26.4% year-over-year increase in used cars and the 30.0% increase in energy prices from last month’s reading; notably oil prices fell nearly 20% during the month of November, so the energy component at least can see some relief in this CPI report. That said, the range of goods and services that see their prices rising is widening, suggesting that Fed Chairman Powell may have been correct in removing the “transient” characterization of price pressures.
Market to watch: EUR / USD
Friday’s inflation report will have a big impact on everything from stocks to bonds to commodities, but we wanted to focus on the pair. EUR/USD specifically. The world’s most traded currency pair has found some semblance of support in recent weeks, but the dominant fundamental scenario that has driven rates down has been the Fed’s relative aggressiveness against the ECB, and if we see another warm inflation reading, this could further widen the monetary policy gap by 2022.
Technically speaking, EUR / USD has spent the last three weeks consolidating in a side range between 1.1200 and 1.1400. This recent range price action has allowed the pair to correct its oversold condition over time, rather than an outright rally in price, potentially paving the way for a breakdown if the inflation reading of Friday leads to a more aggressive drop in the FOMC next week. A break below 1.12 could open the door for a continuation towards the mid-1.10, where the previous resistance from May 2020 and the 78.6% Fibonacci retracement level then converge.
Daily EUR / USD Chart
Of course, no setup is foolproof, so it’s worth considering the reverse scenario: A cooler reading on inflation and / or the continuation of the Fed’s current cut plans could spur the EUR / USD pair on. to cross the 1.1400 threshold and potentially expose the 50 day moving average EMA near 1.1450.
By Matt Weller, CFA, CMT, Forex.com » Official site
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or a solicitation to buy or sell forex foreign exchange contracts or CFDs. Although the information contained in this document has been taken from sources believed to be reliable, the author does not guarantee its accuracy or completeness, and assumes no responsibility for any direct, indirect or consequential damages that may arise from the fact that someone relies on such information.