Will tomorrow's inflation data from the US stimulate the eurodollar?

There has been stagnation on the currency market since the publication of the NFP report. EUR / USD exchange rate after falling at the beginning of last week to around 1,0720, it rebounded to 1,08. The market is waiting for another growth impulse. It seems that there may be a thread tomorrow's inflation reading from the USA. There is still great optimism on Wall Street, which resulted in new highs for the main stock exchange benchmarks.

Easing monetary policy

VIX – an indicator commonly called fear index – it is still within the range of fluctuations at the lower band and so far it is not sending any disturbing signals. The market currently assumes that The Fed will cut interest rates in June. The probability of such a scenario is estimated at slightly above 80%.

The US dollar index has declined slightly over the past week, correcting the recent wave of appreciation that occurred on the day of publication NFP report (February 2) and on Monday, February 5. Recall that data from the labor market turned out to be extremely good, which to some extent postponed the chances of an earlier easing of monetary policy by the Fed.

This week, and tomorrow to be precise, we will learn the publication of the CPI for January for the United States. These data may (but do not have to) be a new catalyst for major changes in positioning on the currency market.

Bloomberg forecasts indicate a further decline in inflation. CPI on an annual basis, it is expected to fall from 3,4%. up to 2,9 percent in January. The core index is expected to decline by 3,9%. up to 3,7 percent The month-to-month dynamics is expected to be 0,2 percent, respectively. and 0,3 percent and be similar to the one a month earlier. As expected, the data may not arouse emotions. A surprise both ways should generate a bit more traffic and perhaps they will indicate further direction for the strength of the US dollar.

Speeches by Fed representatives

This week's retail sales (Thursday) may also weigh on market expectations for the future path of interest rates Federal Reserve, although the importance of these data will be incomparably lower than those scheduled for Tuesday. Today the macro calendar is almost empty. Only speeches by Michelle Bowman, Thomas Barkin and Neel Kashkari from the Fed are scheduled. They are unlikely to bring anything new that the market does not know, and probably will we won't see much of a reaction in the quotations.

The continued strength of the labor market and the slowdown in the disinflation process should prevent the dollar from selling off, and at this point I see greater risk of further USD appreciation, at least in the short and medium term.

Returning to the Old Continent, there have been divergent comments from the ECB recently. Fabio Panetta - the most dovish voice on the Governing Council - supported expectations for a rate cut, saying that The time to loosen monetary policy is "rapidly approaching". In turn, Isabela Schnabel (a "hawk" in the Governing Council) warned against loosening monetary conditions too early. Mario Centeneo (president of the Central Bank of Portugal) and Pablo Hernandez de Cos (president of the Bank of Spain) prefer a cautious approach and do not give dovish advice.

The consensus among policymakers seems to favor keeping interest rates unchanged at least until April wage statistics in Europe, which will shed light on further developments in inflation. The market assumes that the start of easing will take place at the June meeting and they are starting to believe it more and more.

Source: Łukasz Zembik, OANDA TMS Brokers