Sticky CPI Puts Fed in a Bind: US Dollar on the Rise, EUR/USD and GBP/USD Setups to Watch Out For
US DOLLAR FORECAST – EUR/USD & GBP/USD
- The U.S. dollar rises after U.S. inflation data surprises to the upside and unemployment claims fall to lowest level in nearly three months
- With consumer prices running above target and the U.S. labor market still firing on all cylinders, the Fed may be reluctant to cut rates prematurely
- This article focuses on the technical outlook for EUR/USD and GBP/USD, examining critical price levels following the U.S. CPI report.
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The U.S. dollar, as measured by the DXY index, advanced 0.3.% on Thursday in a volatile trading session following the release of two key U.S. economic reports: the December inflation survey and weekly jobless claims data.
For context, headline CPI from last month surprised on the upside, coming in at 3.4% y-o-y, versus the 3.2% y-o-y expected. The core gauge also exceeded forecasts, clocking in at 3.9% – one tenth of a percent above consensus estimates.
Elsewhere, applications for jobless benefits sank to the lowest level in nearly three months last week, indicating that mass layoffs are not yet occurring and that hiring is probably continuing at a good pace, a sign that the labor market is still firing on all cylinders despite the late stage of the business cycle.
US ECONOMIC DATA
Source: DailyFX Economic Calendar
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With consumer prices well above the 2.0% target and a labor market displaying exceptional resilience, the Federal Reserve will be reluctant to cut interest rates sharply, contravening Wall Street’s expectations calling for 135 basis points of easing this year.
For clues on the outlook for monetary policy, it is important to keep an eye on Fedspeak in the coming days and weeks. In light of recent developments, traders should not be surprised if central bank rhetoric begins to lean in a more hawkish direction, a scenario that should be bullish for yields and the U.S. dollar.
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EUR/USD TECHNICAL ANALYSIS
EUR/USD retreated on Thursday but managed to remain above technical support at 1.0930. If this floor holds, the pair could resume its upward journey in the coming days, setting the stage for a move towards 1.1020. On continued strength, attention will shift to 1.1075/1.1095, followed by 1.1140.
On the flip side, if bearish momentum accelerates and the exchange rate slips below 1.0930, a retracement towards 1.0875 may occur – a region where the 50-day simple moving average aligns with the lower limit of a short-term ascending channel. Further weakness could lead to a retest of the 200-day SMA.
EUR/USD TECHNICAL CHART
EUR/USD Chart Prepared Using TradingView
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| Change in | Longs | Shorts | OI |
| Daily | -17% | -5% | -11% |
| Weekly | -14% | 3% | -5% |
GBP/USD TECHNICAL ANALYSIS
GBP/USD weakened on Thursday but held above channel support near 1.2675. The bulls must protect this technical floor at all costs; failure to do so could trigger a pullback towards the 1.2600 handle. Subsequent losses from this point onward could expose the 200-day simple moving average.
On the other hand, if cable reverses higher and manages to push above resistance at 1.2765, sentiment around the British pound could improve further, creating the right conditions for a climb toward the December highs above the 1.2800 level. Further gains hereon out could facilitate a rally towards 1.3000.
GBP/USD TECHNICAL CHART
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Sticky CPI Puts Fed in a Bind: US Dollar on the Rise, EUR/USD and GBP/USD Setups to Watch Out For
The US dollar has been on a steady climb this past month, nearing its highest levels against major currencies such as the euro and pound sterling. One of the main factors contributing to this rise is the recently released Consumer Price Index (CPI) data, which showed a significant increase in inflation. This puts the Federal Reserve (Fed) in a tough position as they try to balance economic growth and price stability. In this article, we will delve into the impact of sticky CPI on the US dollar and what traders should watch out for in the EUR/USD and GBP/USD setups.
Understanding the CPI and its Impact on the US Dollar
The Consumer Price Index is a measure of the average change in prices of goods and services purchased by consumers in a given period. It is one of the primary indicators used by the Fed to determine the level of inflation in the economy. A higher CPI indicates that the prices of goods and services are increasing, while a lower CPI suggests prices are stable or even decreasing.
Inflation is a double-edged sword for the economy. On one hand, a moderate level of inflation is healthy as it stimulates consumer spending, boosts economic growth, and encourages investment. However, high inflation can have a detrimental effect on the economy, leading to a decrease in purchasing power, lower consumer spending, and slower economic growth. This is why the Fed closely monitors the CPI and adjusts its monetary policy accordingly.
Sticky CPI and Its Impact on the Fed
Sticky CPI refers to the trend where prices tend to move slowly in response to changes in demand and supply. This can be seen in many areas such as housing, healthcare, and education where prices remain relatively stable despite changes in economic conditions. With the recent CPI data showing an increase in inflation, the Fed now finds itself in a tight spot as they try to determine the best course of action.
On one hand, the Fed needs to keep inflation under control to avoid the negative repercussions of a high CPI. On the other hand, they also need to support economic growth, especially in the wake of the pandemic. This dilemma has led to much speculation on the Fed’s next move and has also contributed to the US dollar’s rise.
EUR/USD and GBP/USD Setups to Watch Out For
The EUR/USD and GBP/USD are among the most heavily traded currency pairs, and their performance is closely tied to the US dollar’s strength. Therefore, the current economic landscape has a significant impact on these pairs. Here are some setups to watch out for in the coming weeks:
1. EUR/USD
As the eurozone struggles with high inflation, the European Central Bank (ECB) has maintained a dovish stance, keeping interest rates unchanged at a record low. With the Fed expected to raise interest rates sooner than the ECB, the EUR/USD pair is likely to slip further. Traders should look out for potential short positions, with a key level to watch being the support level of 1.17.
2. GBP/USD
The pound sterling has also been feeling the heat from the US dollar’s rise, with the GBP/USD pair dropping to its lowest levels in a year. The Bank of England (BoE) has signaled they may follow in the footsteps of the Fed and raise interest rates to control inflation. However, this decision is not expected until early next year, giving the US dollar an edge over the pound in the near term. Traders should watch out for a break below the support level of 1.37, which could open up opportunities for short positions.
Practical Tips for Traders
Navigating the current market can be challenging, but there are a few things traders can keep in mind to stay on top of the game. Here are some practical tips to consider:
1. Stay informed – Keep track of economic news and data releases, particularly those related to the Fed, ECB, and BoE. This will give you a better understanding of the market trends and potential setups.
2. Use technical analysis – Utilize technical indicators and chart patterns to identify potential entry and exit points in EUR/USD and GBP/USD trades.
3. Monitor support and resistance levels – Keep track of key support and resistance levels in the market. These can be used to determine price targets and risk management strategies.
Final Thoughts
The US dollar’s rise, driven by the sticky CPI and potential actions by the Fed, has a significant impact on major currency pairs such as the EUR/USD and GBP/USD. Traders should pay close attention to economic data and practice sound risk management strategies when trading these pairs. As we await the Fed’s next move, staying informed and keeping an eye out for potential setups can help traders navigate the current market successfully.
