EUR/USD – US CPI no game-changer for interest rate expectations

• US CPI (YoY) 3.4% in December (3.1% in November)
• US Core CPI (YoY) 3.9% in December (4% in November)
• EURUSD fails at 1.10

The CPI report has become a source of good news for investors, as inflation has fallen sharply to within touching distance of the Federal Reserve’s 2% target. The last step may be the hardest, as many have warned, but investors are clearly of the view that the hard work has been done and it’s only a matter of time until rates are falling.

Today’s report was not expected to be a game-changer, with forecasts pointing to only marginal moves in December and that’s exactly what we got. Unfortunately, the surprises came in the wrong direction which is what’s knocked sentiment in early trade on Wall Street.

Ultimately, it doesn’t really change anything and interest rate expectations are broadly as they were. There’s plenty more to come between now and March that will dictate whether that meeting is as live as markets are currently positioned for.

Jobless claims were no more inspiring, barely changed from a week ago, and marginally lower than expected. Continuing claims were slightly lower but the trend remains as it was. Layoffs are low but the trend in continuing claims is higher, suggesting few are losing their jobs but those that are, are struggling to find new work. Perhaps not the weakness the Fed expected to see but maybe enough to get inflation back to 2%.

EURUSD fails at 1.10 again

Before the release, the pair was flirting with 1.10 again and, in part due to the release, it failed to break above here before trading lower on the day.

EURUSD Daily

Source – OANDA

While this could be viewed as a bearish signal, the recent trend remains bullish since the October lows and the rebound off the 61.8% Fibonacci retracement level last week supported this. Another failure at 1.10 may weaken that position but only a break below 1.0882 would suggest the trend has changed.

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