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EUR/USD – Three-month low after US inflation disappointment

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  • US inflation falls less than expected
  • Fed rate cuts scaled back in markets
  • EURUSD falls and momentum builds

This is not the inflation report that the Federal Reserve wanted to see and markets have responded accordingly.

Inflation in January was hotter than expected across the board. The headline and core monthly readings printed at 0.3% while the annual readings came in at 3.1% and 3.9%, respectively.

While an improvement at the headline level, it’s less so than markets were positioned for and as a result, all but killed any hope of a first rate cut in March. Markets are now priced at 93% for a hold next month, quite the shift from a month ago.

What’s more, only 75 basis points of rate cuts are now priced in this year; quite the drop from 175 at one point last month. It would appear traders now view the resilient economy will, in fact, come at quite a significant cost.

That said, while markets appeared to be positioned too optimistically last month, I wonder whether the pendulum has now swung too far in the other direction. We have still seen substantial progress on inflation and I expect we’ll see more over the coming months.

Can EURUSD hold above 1.07?

Interestingly, EURUSD is continuing to hold above 1.07 around the 61.8% Fibonacci retracement level which begs the question of whether the data was as bullish for the greenback as it initially appeared.

EURUSD Daily

Source – OANDA

The 4-hour chart may offer more insight into this. Not only has the pair broken below its recent lows, it’s done so while gathering momentum which could be a bearish signal, even if the price is still holding above 1.07.

EURUSD 4-Hour

Source – OANDA

 

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary.

His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News.

Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
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