EURUSD in Light of Upcoming EA/US Data

The ECB faces a complex policy decision as the continuing tightness of the US labour market may reinforce the Fed's more hawkish stance. 

Eurozone Stagflation Likely to Persist

According to the latest data, the outlook of the Eurozone economy remains challenging. HCOB Preliminary PMI figures for December showed the manufacturing sector contracted for the eighteenth consecutive month on Tuesday, suggesting the single currency area was in recession during the year's second half. However, inflation is anticipated to have accelerated further in key member states last month. Given that the ECB recently signalled an end to interest rate rises despite rising prices, hawkish policymakers may feel vindicated in their view that ending tightening may be premature. Nonetheless, core inflation is projected to continue falling, which may not be enough to convince markets that the bank will change its course. 

On separate data, French and German inflation are expected to report faster annual growth this week. On Thursday, the French annual CPI is forecasted to rise to 3.8% from 3.5% prior. Germany is anticipated to see an even sharper acceleration to 3.7 % year-on-year from 3.2% prior, bringing both countries away from the ECB's 2% target. On Friday, Eurozone inflation for December is projected at 2.9% compared to last month's 2.4%. However, core inflation is estimated to continue downward, easing to 3.4% from 3.6%. 

US Labour Market Continues in Resilience 

Across the Atlantic, the US jobs report on Friday will provide an update on labour market tightness, which could influence the Fed's policy stance. 

Total Non-farm payrolls are projected to have declined slightly to 150K in December from 199K in the prior month. The unemployment rate is expected to worsen to 3.9% from 3.7% despite a falling participation rate. And Average hourly earnings are anticipated to remain robust at 4.% year-on-year, above the Fed's inflation target and representing potential upward pressure on inflation.

Fiber Hinges on CPI Forecast Divergence, If Any

This year, risk aversion has driven the euro lower against the dollar as standard trading patterns resumed following the holiday period. Investors may view the ECB as prioritising economic growth over inflation. However, if Eurozone consumer prices significantly overshoot forecasts, hawkish policymakers could find new arguments for maintaining higher interest rates, reversing the single currency's recent depreciation.

Broadening Wedge Points to At Least Pullback

The EURUSD currency pair may have completed a broadening wedge pattern by $1.1139, with the 5-wave impulse to $1.09 opening the door to $1.0756. However, only a breakout below the lower trendline would confirm such a downward extension. In the short term, with the 5th wave ending and a bounce at the round support, the currency pair may see another attempt above $1.10. This could lead to a H&S pattern, with the upside target revealing the right shoulder. If incurred, EURUSD may not weaken below $1.08 or simply revere rejection by the lower trendline.

Source: SpreadEx / EURUSD

Key Takeaways

Eurozone inflation remains above the ECB's 2% target but is expected to ease slightly, while economic growth remains weak. However, some ECB policymakers may argue for higher interest rates if inflation exceeds forecasts. In the US, job growth is projected to slow slightly, but wage growth is expected to remain robust above 4%, which could put upward pressure on inflation and support a hawkish Fed stance. The near-term EURUSD outlook hinges on any divergence in the Eurozone and US inflation forecasts.