The data released on Thursday showed a slowdown in U.S. inflation. All components of the report were in the red zone, falling short of forecasted levels. On one hand, this is an important—one could say pivotal—moment for the EUR/USD pair (as well as for other dollar pairs). Now, representatives of the "dovish camp" at the Federal Reserve have additional arguments to support their position. A weak CPI is a strong card for the "doves" amid a cooling U.S. labor market, a declining ISM manufacturing index, stagnant retail sales, and weaker consumer activity. All these factors contribute to the case for further Fed rate cuts. However, there is one major "but" regarding inflation, which we will discuss shortly.
According to data released on Thursday, the overall consumer price index in November decreased to 2.7% year-on-year, marking the lowest level since July, after rising to 3.0% in October. At the same time, most analysts had forecasted an increase to 3.1%. The core CPI, excluding food and energy prices, dropped to 2.6%, while the forecast anticipated a rise to 3%. This is the lowest level for the indicator since March 2021. The smallest price increases were recorded for automobiles (0.6%) and clothing (0.2%). A slowdown in rental prices—one of the index's largest components—was also observed. Some consumer services (such as hotels and entertainment) showed weak growth or even a slowdown.
Despite such a uniformly negative result, buyers of EUR/USD are not in a rush to "pop the champagne." The pair impulsively jumped to 1.1763 but then retreated to the base of the 17 figure. Market participants expressed doubts about the "truthfulness" of the published data. According to many analysts, the downward trend in key inflation indicators was caused by a technical effect. The reason is that, due to the prolonged shutdown, the BLS (Bureau of Labor Statistics) began collecting November data later than usual, just before the holiday season (Thanksgiving and "Black Friday"). This is a season of holiday sales when retailers lower prices by offering discounts and promotions.
Most economists surveyed by the Financial Times believe that the November report is a "star report," an inflation indicator that is technically understated and "does not fully reflect the correct decline in inflation." It is presumed that the actual inflation dynamics may be higher.
It is also important to note that the publication of the October report was canceled: BLS officials stated that it was not possible to collect data for that month retrospectively. Meanwhile, the November report was released in truncated form (it does not include monthly figures)—market participants are forced to evaluate inflation dynamics solely on annual figures.
In other words, the overall skepticism of traders appears quite justified. Based on the data released on Thursday, we cannot confidently say that a sustainable (keyword) downward inflation trend is underway. For a proper evaluation, we need to wait at least for the December report—and only then draw any "far-reaching conclusions."
Given the dynamics of EUR/USD, traders have come to the consensus that optimistic interpretations of the inflation report are erroneous. After updating the intraday high (1.1763), the pair retreated to previous positions near the bottom of the 17 figure.
Another indication that traders were skeptical of the release. According to the CME FedWatch tool, the probability of a Fed rate cut at the January meeting is currently at 26%. Prior to the release, this probability was assessed at 23%. Thus, despite the "red hue" of the CPI report, dovish expectations regarding further Fed actions have not intensified in the market. The probability of a rate cut at the March meeting has also increased slightly—from 42% to 47%.
In other words, market participants are nearly certain that the central bank will keep the interest rate unchanged in January, with the likelihood of a March cut assessed at 50/50. Similar assessments were made before the report's publication, which essentially did not alter forecast expectations.
So, fundamentally, we have returned to the "zero point"—the fate of interest rates will be determined by inflation, the December figure of which we will only learn in January (along with the December Non-Farm Payrolls). The current situation remains suspended: the scales could tilt either towards a "dovish" scenario or towards maintaining the status quo.
The EUR/USD pair has also remained at its previous positions, between the middle and upper lines of the Bollinger Bands on the daily timeframe, as well as above all the lines of the Ichimoku indicator. Thus, the priority remains for long positions, but the cap of the upward movement stands at 1.1770 (the upper line of the Bollinger Bands on the four-hour chart).
