Tuesday's excitement with US inflation

On Monday, risk appetite prevailed in the financial markets. Wall Street indices turned green. SP500 gained more than 1,4 percent. The Dow Jones gained 1,58 percent. and the Nasdaq closed the day higher by 1,26%.

Today, investors' eyes are focused on the release of US CPI inflation, which will help determine the path of Fed rates in the coming months. EUR / USD it is still in a technically critical place. Breaking the 1,06 level is likely today. However, certain conditions must be met.

Awaiting FED decision

Tomorrow the Federal Reserve will make a decision on interest rates at the end of the last meeting this year. Greater volatility in the markets may appear today, however, when the market will receive data on the dynamics of price growth in the US economy in November. After the Tuesday-Wednesday emotions, we still have a decision on the cost of money to be made by the ECB and the Bank of England on Thursday. Then there will be a malaise in the market as the world prepares for the upcoming Christmas.

If today we see another decline in US inflation (the Bloomberg consensus assumes a level of 7,3 percent., the reading for October shows 7,7 percent.), This will allow all those who until recently expected that inflation to get out of control and the US central bank to take desperate countermeasures. Let's remember, however, that current levels still show that it is quite far from the 2 percent target. Downward trend in readings CPI has been going on since June. It is therefore considered that the inflation peak was reached in the summer at the level of 9 percent. and now we are only on a downward trend.

The market needs an excuse

As in recent times, Powell had to remind the market that the pace of monetary tightening will be reduced from December (which resulted in another impulse for dollar weakening), so this time the market awaits another confirmation from the macro data. EUR/USD quotes show that investors are waiting for the next impulse. The exchange rate is still close to the level of 1,06 and has not wanted to move away from it for several days.

The chart shows an "ascending triangle" pattern, which shows a greater chance of continuing the uptrend. In order to "break" this level, an excuse is needed, and today's inflation data seems to be perfect. The drop in CPI will weaken the USD again. Reading between 7,7 and 7,3 percent. will cause the dollar to depreciate, but the move will be smaller than what would occur if the numbers showed a level lower than the market assumes.

Quite the opposite reaction of the market can be assumed if the CPI index showed a higher value than in October. In such a scenario, I assume EURUSD drops even to the level of 1,0350.

Source: Łukasz Zembik, OANDA TMS Brokers