Talking Points

US Core CPI impact on trader’s interest rates expectations.

EURUSD Price Forecast: Technical analysis 8-hour chart

The US Consumer Price Index “US Core CPI” changes, a critical inflation gauge for the FED and traders were released this morning, the core CPI which excludes energy and food prices due to their volatile nature rose 0.3% for November 2023 after its previous October 2023 increase of 0.2%, as for the Core CPI y/y, it reflected an increase of 0.4%, although both were in line with analysts’ expectations, the changes still reflected that inflation is not likely to fall that quick to the FED’s target of 2%.

An initial reaction to this morning’s news was a percentage of traders began reducing their speculative expectations on the FED’s Interest Rate cuts path for 2024. According to the percentage changes on CME’s FedWatch Tool, traders mainly reduced their bets on rate cuts for March 20^th, 2024, and May 1^st, 2024, the expectations for a 25-bps cut for March’s meeting stands at 40.2%, down from 43.8% before the CPI release, and as for May 1st, 2024 meeting, the expectations for a 50-bps cut is currently at 23.9%, down from 27.6% before CPI release.

Markets will pay close attention tomorrow to the FED’s Statement, monetary policy projections, the DOT Plot, and Jerome Powell’s answers during the FED’s Press conference, the released CPI numbers for today may help the FED’s case for interest rates to remain “higher for longer”. The FED needs to see consistently lower CPI numbers before considering any comments or decisions on rate cuts, this may not happen till we are well into 2024, and till then, the FED may be expected to keep a balanced tone as investors continue to speculate on interest rates path. This morning, according to Bloomberg, Janet Yellen, the US Treasury Secretary said, “She doesn’t believe the “last mile” in returning inflation to the Federal Reserve’s 2% goal will be especially difficult”, on the other hand, some analysts are questioning if the FED’s target is still at 2% or if the FED looking at a different percentage.

EURUSD – 8-Hour chart

• Price continues to create higher lows and trade above an ascending price channel which began in October 2023, the price broker above the upper channel border in November for a brief time and currently trading back within the channel and near its mid-range. We may also have a shortfall in place as marked on the chart.
• The most recent price action reflects a positive divergence between price action which is plotting lower lows and RSI “1D 5 Close” which is plotting higher lows. RSI is at oversold levels with a double bottom formation in place and approaching its Moving Average.
• A confluence of resistance represented by the weekly and monthly pivot points lies within the range of 1.0807 and 1.0790, the price action is currently testing the range.
• MACD line just crossed above its signal line and its histogram is turning positive.

Conclusion: If EURUSD price manages to break and remain above the pivots confluence of resistance, price action may make its way to the upper channel border which if broken, can also lead price action to the next resistance level. Price action will be heavily influenced by the FED as well as ECB which is also due this week, markets do anticipate higher than average volatility and therefore as traders, we should be mindful of false breakouts which may appear on charts with shorter time frames.

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