EURUSD Hangs on US CPI and EU GDP

The rubber hits the road for the interest rate outlook, with US inflation expected to stay elevated, while a second reading of Eurozone GDP is expected to confirm stagnation.

CPI Back in Renewed Focus After JP Speak

Last week, yields on US treasuries fluctuated quite a bit, at first sliding as investors priced in slower economic growth before suddenly jumping ahead of the weekend. That was after Fed Chair Jerome Powell gave a speech in which he said that the Federal Reserve was not confident it had done enough to bring inflation down, bringing tomorrow's CPI figures into renewed focus. His comments were seen as pushing back against a narrative that higher yields were equivalent to a rate hike. The market sees less than a 20% chance that the Fed will go through with another rate hike - but a surprise in the data could change that position and support the greenback.

The consensus of expectations is that October headline inflation will break the months-long rising trend and fall back to 3.3% from the 3.7% recorded in September, with a substantial drop attributed to lower energy prices. On the other hand, the core rate is expected to remain extremely sticky, coming down just a decimal to 4.0% from 4.1% prior.

Future Fed and ECB Policy Trajectory

It should be noted that another set of employment and inflation data is still coming out before the Fed meets again for the final time this year. That could take some of the punch out of the data if it is significantly beyond expectations. But the focus is likely on core inflation as the Fed frets over a potential economic slowdown. The issue now might hinge not so much on whether the Fed will hike, as the vast majority seem to agree that the pause will be indefinite now. The focus could not turn to when rates are cut, and the current consensus is for some time in the middle of next year. The speed at which inflation comes down could accelerate or slow down that timeline.

When to cut next is the issue for trackers of the ECB; after it is all but confirmed, no more rate hiking. But for the shared central bank, the situation is different as the European economy faces stagnation that could tip into further negative growth. The first look at the euro area economy disappointed, chalking up the first negative reading that could indicate a technical recession at -0.1% GDP growth in the third quarter. The consensus among analysts is that the figure will be confirmed in the second reading tomorrow, bringing back questions about how soon the ECB will cut rates. It could further weaken the euro against the dollar if it is before the Fed cuts. On the other hand, an upward revision could provide psychological relief for the hawks at the ECB, who are under increasing pressure to support the economy.

Broadening Wedge Implies Down then Up

EURUSD has progressively printed higher highs and higher lows, revealing a broadening wedge pattern pending pullbacks and eventually a break past 1.0756. Typically, wedges are followed by deep corrections, implying a downward leg towards 50% and 61.80% of the whole upward leg at 1.0602 and 1.0565 might weigh on prices. If the swing resistance gives way to bullish price action, the pattern will likely be invalid, exposing 1.08 and beyond, but still, in a potential falling flag.

Source: SpreadEx /EURUSD

Key Takeaway

US CPI and Eurozone GDP readings are expected to impact interest rate outlooks and the EURUSD exchange rate. The consensus is that the headline inflation will decrease to 3.3% from September's 3.7%, with core predicted to stay sticky at 4.0%. The data and future employment and inflation data will impact the Fed's policy trajectory, with a potential rate cut in the middle of next year. For the ECB, the focus is on when to cut rates, given the confirmed halt in rate hikes and the euro area's stagnation. The first look at the Eurozone's GDP growth in Q3 showed a -0.1 % decline, potentially indicating a technical recession. Analysts expect the second reading to confirm, raising questions about an earlier rate cut.