Inflation in the euro zone and NFP – these are the key events today

Today, the EUR/USD rate will be determined by the inflation results from the euro zone, and in particular the monthly report on the condition of the American labor market. The ECB and the Fed have most likely ended the cycle of interest rate increases. Bets are currently being made as to which central bank will be the first to start moving in the opposite direction.

In the case of both the ECB and the Fed, the market significantly accelerated its expectations for a rate cut. Today the main question for EUR / USD is whether the data will confirm these expectations.

Increase in inflation in the euro zone

Today's increase in December inflation in the euro zone should not be too surprising. This will be due to the fact that energy prices dropped sharply in December 2022, hence the likely increase in the HICP. Yesterday we learned the result for Germany. Inflation there increased from 2,3 percent up to 3,8 percent (HICP) and from 3,2 percent up to 3,7 percent (CPI) on a year-to-year basis. Today's data should not cause that the market will significantly revise its expectations. It seems that only January's data will be more important for the ECB.

Many companies adjust their prices at the beginning of the year. Therefore, the next CPI/HIPC publication will probably have a greater impact on market volatility, because it will be a kind of starting point. If it takes longer for inflation to fall to target levels, The ECB is likely to cut rates later, which would be a positive signal for the euro. Currently, expectations regarding interest rate cuts may soon require some adjustment.

We will learn the data from the NFP report

The start date of the reductions is equally important for the Federal Reserve. In the case of data from the USA, in addition to inflation, the market also monitors the labor market. We know perfectly well that the Fed has a double mandate and, in addition to ensuring price stability, is also responsible for controlling employment. Today is the first Friday of the month, so as usual we will find out NFP report.

Yesterday's ADP surprised with a higher result, but this does not immediately mean that today's official data will also be better. Forecasts indicate increase in employment in the non-agricultural sector at the level of 175 thousand. and a change in the unemployment rate from 3,7 percent. up to 3,8 percent However, the result is still above 100. indicates that the labor market is in quite good condition. In my opinion, only a drop below this level could have a greater impact on market volatility. Either way, worse data from 14:30 p.m. will weaken the USD. The scale of depreciation will depend on the size of the negative surprise.

Source: Łukasz Zembik, OANDA TMS Brokers