The EUR/USD might rally after Wednesday's Fed announcement and news conference -- if they merely meet hawkish market expectations -- but price action after U.S. retail sales data suggests investors should consider any rise as a selling opportunity as rates and inflation remain dollar supportive.
EUR/USD rallied after unexpectedly weak November retail sales nW1N2T0004, as U.S. interest rates and the dollar softened, but then reversed those gains, indicating investors are wary of the Fed leaning more hawkish than expected.
Investors have already priced in expectations for a quicker pace of tapering and an initial hike in Q2 2022 EDM2.
Should the Fed only meet those expectations a EUR/USD relief rally is possible as dollar longs take profits.
But, pricing in Eurodollar EDK2 and Euribor FEIH3 futures as well as 2-year German-U.S.
yield spreads indicate investors foresee Fed being more aggressive then the ECB with rate hikes.
Should a EUR/USD relief rally ensues it's likely to be sold as a test of the 1.1000 are still seems likely.
However, there is also the possibility that the Fed will be more hawkish than expected, which would most likely send EUR/USD lower.
inflation continues to run hot, as the upside surprise in November PPI nL1N2SZ16U demonstrated.
Nor does the U.S. inflation picture appear anomalous. UK CPI hit a 10-year highnL8N2T018X and lumber's rally LBc1 retraced over 50% of the May-August decline, adding to signs that price growth will remain a concern for the Fed and supportive for the dollar.
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