What are the odds of breaking 1,05 on Eurodollar (EURUSD)?

Eurodollar (EURUSD) tested the 1,05 level twice recently but failed to break it. For two weeks we have been observing the consolidation of quotes, the market is waiting for some breakthrough in the data to generate another strong impulse and set the direction for the near future. By the end of the week we will receive a lot of macro publications. Today, the focus is on inflation in Europe, but also Powell's speech at the Brookings Institution.

What decisions will the ECB take?

The euro may continue to gain. However, this would require higher estimates of HICP data from the euro zone, which will be released at 11:00 GMT. Yesterday Germany presented its inflation reading, which was below expectations. The slight decline is due to energy prices rising less yoy in November than in October, and this was not offset by slightly stronger food growth. Despite the decline in the CPI, the core reading remains high.

The market is divided on the next move EBC. Expectations oscillate between a change of 50 and 75 basis points. Today's release of the HICP from the euro zone may give us another clue as to what move the European institution will decide to take. If we receive confirmation that inflation is slowing down, then the euro may lose value, and the double top pattern seen on the EUR/USD chart will prove to be an effective predictor of the major currency pair's decline.

Important data will come from the US

Not without significance for the quotations of the main currency pair will be data from the US, which we will know a lot by the end of the week. Today we have the ADP report, which will be a preview of Friday's NFP. The condition of the labor market will also be indicated by the JOLTS survey. Added to this is the US GDP reading for the third quarter. Tomorrow the market will be watching the US spending report, in particular the PCE core index as well as the ISM for manufacturing. Friday is mentioned earlier US labor market report.

Worse data from the economy (ISM, GDP, NFP, JOLTS) will weaken the USD, as the market will be more convinced that the Fed will not want to lead to a strong slowdown and will significantly ease its monetary policy. Representatives FOMC recently they have been outdoing each other in providing hawkish comments, but this does not cause any excessive strengthening of the USD. Today, more light on the December decision may be shed by Powell's speech at the Brookings Institution (the last one before the December meeting). The chairman will talk about the outlook for the economy, inflation and the changing labor market.

Clearly breaking the 1,05 level by the EUR/USD rate is possible only when inflation in Europe does not show signs of easing and the US economy shows signs of weakness. Such a mix of data will strengthen the scenario that the ECB will be on a more restrictive course than the Federal Reserve in the near future.

Source: Łukasz Zembik, OANDA TMS Brokers