EUR/USD rebounded after holding above last week's 1.1695 low during an earlier test as doubts about a U.S. pandemic relief bill nW1N2D300Y and unexpectedly strong U.S. inflation nAPN0GPLF4 weakened real Treasury yields and could put the Fed, and dollar, in a bind.
Lingering spec longs eager to pare positions obstructed EUR/USD's rebound near the 10-day moving average and tenkan either side of 1.1800.
Clearing that resistance may depend on market perceptions, particularly the S&P 500, of strengthening core U.S. inflation as either indicative of recovering demand or threatening low-cost funding of spiraling U.S. debt, which could force the Fed to increase QE, harden forward guidance or undertake yield curve control.
The worst-case scenario for the dollar would be the Fed fighting rising inflation, COVID-19 economic weakness and waning fiscal support.
With the core CPI year-on-year rate at 1.6%, the Fed can still wait, particularly if they pursue average-inflation targeting.
EUR/USD's Wednesday outlook depends on S&Ps' response to CPI and whether it can close above 1.1800 and renew its quest to test 1.20.
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