EUR/USD rallied to a two-month high on Thursday and faces more potential gains as long as markets remain reluctant to price in more aggressive Fed tightening than already expected nL8N2TT2X3.
This week Fed Chair Jerome Powell eased market concerns of sharper rate hikes, and that relief was on display after above-forecast December CPI failed to drive U.S. interest rates EDH2US10YT=RR to new trend highs.
Eurodollar futures reinforce that view, indicating the Fed's hiking cycle will peak near mid-2024 EDM24 and will remain near 2.0% through mid-2027 EDM27, which could encourage dollar longs reduce positions.
CFTC data NETUSDG10= indicates net-long dollar positions have been reduced but remain elevated.
Further unwinding of those longs should underpin EUR/USD.
EUR/USD techs highlight upside risks.
A monthly bull hammer has formed for January, EUR/USD trades above the daily cloud and rising daily, monthly RSIs imply upside momentum.
EUR/USD longs have the advantage and a test of 1.1690/1.1720 resistance seems likely.
Gains for the pair could be quickly erased, however, especially if U.S. inflation fails to moderate.
For now, inflation linked swaps USIL5YF5Y=RR indicate investors expect inflation to cool.
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