EUR/USD rallied toward 1.1400 at the end of November but has since traded lower and hugged the 61.8% Fibo of the 1.0636-1.2349 rally as investors await key inflation data, which could drive a resumption of the broader down trend.
November CPI data is due Friday.
Estimates project year-on-year CPI USCPFY=ECI to rise from October but month-on-month USCPF=ECI to be lower.
Upside surprises would lead investors to expect the Fed to turn more hawkish especially since Fed Chair Jerome Powell suggested in testimony to Congress nL1N2SM2J8 that inflation might not recede as expected.
Above-estimate results could drive U.S. rates higher as investors pull forward expectations for the first Fed rate hike, widening the gulf of policy divergence between the U.S. and euro zone, as well as implied rates reflected in eurodollar EDM2 euribor prices FEIM2.
Yield spreads between 2-year German DE2YT=RR and U.S. US2YT=RR, which EUR/USD is typically correlated with, should widen further should U.S. inflation continue to rise.
Rising U.S. rates should underpin the dollar while rate differentials should weigh down EUR/USD.
Investors may drive the pair below the July 2020 EBS low at 1.1185 and the next leg of the bear market could be underway.
Shorts would then target the psychological 1.1000 level.
For more click on FXBUZ