US Dollar Recovers After US Inflation Data, EUR/USD Unable to Hold 1.08

Modified: Tuesday, 12 December 2023 23:00 BST - Written by David Woodsmith

STORY LINK US Dollar Recovers After US Inflation Data, EUR/USD Unable to Hold 1.08

After moving higher into Tuesday’s New York open, the Euro to Dollar (EUR/USD) exchange rate briefly spiked to highs at 1.0825 in immediate reaction to the US inflation data.

There was notably choppy trading after the data with EUR/USD retreating to lows at 1.0760 before trading around 1.0790 in choppy trading.

Interest rate expectations will remain crucial for EUR/USD.

Following the US data, market expectations of a March Fed rate cut dipped to near 40% from 50% previously with the chances of a May cut declining to around 75%.

According to ING; “Our bias would be to the downside today and into tomorrow night’s FOMC meeting, while it would switch to the upside on Thursday given that the pricing of the 2024 ECB easing cycle looks far too aggressive at well over 100bp.”

US consumer prices increased 0.1% in November compared with consensus forecasts of no change, but the year-on-year rate met expectations with a slight decline to 3.1% from 3.2%.

This was a 4-month low and close to a 30-month low.

Energy prices declined 2.3% on the month with a 5.4% annual decline

Core prices increased 0.3% on the month which matched expectations and the year-on-year rate held at 4.0%.

There was an increase in used vehicle prices after five months of declines while apparel prices declined on the month.

The so-called supercore inflation rate which tracks the cost of services minus energy and housing, rose 0.44% in the month up from 0.22% in October.

Shaun Osborne, chief foreign exchange strategist at Scotiabank commented; "Once we dig into the data we can see that some of the underlying numbers are perhaps a little sticky, particularly the supercore numbers."

There was little change in market pricing for the Fed Funds interest rate with the chance of a March rate cut still seen at close to 50% and over 80% by May.

Scotiabank’s Osborne added; "Generally we’ve seen sufficient progress on inflation to keep a rate cut as the next move, but it’s really about the timing at this point and these numbers suggest that we still need to see some further progress on some of these underlying measures before the Fed will be comfortable cutting interest rates."

Erik Weisman, chief economist and portfolio manager at MFS Investment Management added; "The Fed will feel that it cannot afford to have financial conditions ease further, as that could potentially re-accelerate labour demand and put renewed upward pressure on the rate of consumer inflation."

He added; “Whether the market takes the hint remains to be seen and will likely be driven by the unfolding macro data more than Fed jawboning."

As far as the Euro-Zone is concerned, the German ZEW economic sentiment index improved to 12.8 for December from 9.8 previously and above forecasts of 8.8 and this was the fifth successive increase,

There was, however, only a slight improvement in the current conditions component which failed to meet market expectations and maintained concerns surrounding the near-term outlook.

ZEW president Achim Wambach commented; "Despite the current budget crisis, the assessment of the situation and economic expectations for Germany have once again slightly improved."

He added; "This is due to the fact that the share of respondents expecting interest rate cuts by the ECB in the medium term has doubled."

LBBW analyst Elmar Voelker commented; "Regardless of the continuing upward trend, however, the emerging buoyant forces are still very weak and fragile. Nevertheless, with today's data, there is a good chance that the Ifo business climate for December will also point slightly upwards again."

German bund yields declined to near 8-month lows which sapped Euro support.

Oil prices posted sharp losses on Tuesday with global benchmarks testing 5-month lows with Brent trading around $73.60 p/b.

Lower oil prices will provide an element of support for the Euro.

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TAGS: Euro Dollar Forecasts