Trade War, US CPI, US Dollar – Talking Points
- US Dollar braces for volatility ahead of CPI data, EU trade talks and Fed speak
- Cross-Atlantic trade talks could boost sentiment and cool 2020 Fed rate cut bets
- EUR/USD may attempt to climb back onto the November uptrend after it broke
At the start of Asia’s Tuesday trading session, the Japanese Yen fell to its weakest point against the US Dollar since May 2019 as equity futures aimed higher. The perky market mood comes ahead of the signing of “phase 1” of the US-China trade deal on Wednesday. This came as United States Trade Representative Robert Lighthizer says both sides have finalized the translation of the trade accord.
USD/JPY, AUD/USD, S&P 500 Futures – Daily Chart
USD/JPY chart created using TradingView
How Will CPI Data Affect Fed Outlook?
The US Dollar may rise if CPI data exceeds expectations and chills 2020 Fed rate cut bets. Year-on-year CPI is expected to grow 2.4 percent for December, with its ex-fresh food and energy twin anticipated to remain unchanged at 2.3 percent. While these are both above the Fed’s 2 percent objective, Chairman Jerome Powell stated that it would require a sustained period above their target before they would consider hiking rates.
The pick-up in inflation comes as US-China trade tensions cool and investors are rejoicing that the prospect of a soft détente could provide a comparatively more certain environment in which to conduct business. The Sino-US conflict has had a disinflationary impact across the global economy and led to weaker FDI and greater capital outflows from emerging market economies.
But now, revived risk appetite has pushed equities like the S&P 500 index to multiple record-breaking highs amid market-wide buoyancy. Industrial statistics continue to be soft, with the ISM manufacturing report recently having printed its weakest reading since 2009. The consumer has remained the recession-repelling force and its resilience may be what lies behind improving CPI data.
EU-US Trade Talks: What to Expect
The EU’s new trade chief Phil Hogan will be meeting with United States Trade Representative Robert Lighthizer to discuss future trade relations and avoid escalation. The talks will extend through January 16. The Administration may take a soft approach to policy towards the EU for now amid market-wide buoyancy from the prospect of the US-China trade deal signing on Wednesday.
As such, the nature of the commentary may be superficial, but it may still boost market sentiment as global equities continue to climb. EUR/USD may subsequently rise on the optimism, though its gains could be curbed by the publication of US CPI data. However, EU-US trade relations may later crumble and hurt the Euro, especially after Mr. Lighthizer’s remarks on auto tariffs and the dispute over France’s digital tax.
Fed-Speak May Cool Recession Fears, Boost Market Mood
Kansas City Fed President Esther George will be giving her outlook for on economy. If she strikes optimistic undertones and cools easing expectations, it could pull EUR/USD down. This came after Boston Fed President Eris Rosengren’s commentary chilled rate cut bets and sent US 10-year Treasuries yields higher. Officials have made it clear that unless economic conditions materially worsen, they will not adjust interest rates.
EUR/USD Technical Analysis
EUR/USD has climbed out of the 1.1091-1.1121 congestive range and may have established the upper layer as a new support. This came after the pair broke the November uptrend, though recent price action suggests EUR/USD could stage another attempt at re-saddling itself on the rising support channel.
Keep in mind, major fundamental risks this week may induce higher-than-usual volatility which could skew the underlying trajectory for the pair. To get more in-depth analysis on the impact of geopolitical risks and economic data on FX markets, be sure to sign up for my weekly webinar here!
EUR/USD – Daily Chart
EUR/USD chart created using TradingView
US DOLLAR TRADING RESOURCES
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter