Traders look to US CPI for EUR/USD's next decisive move

FUNDAMENTAL OUTLOOK

U.S. DOLLAR:

On Friday, the US dollar surged higher following the release of the US NFP report, which revealed that August job growth nearly tripled the market's expectation of 56,000. However, the greenback's gains were short-lived, as the NFP-inspired moves were largely reversed later.

This occurred because traders were not concentrating on the NFP, but rather on the CPI. The market follows the data that the central bank prioritizes, and the Fed's current priority is inflation.

Indeed, only one day prior to the NFP release, Fed Governor Waller stated he would back holding rates steady at the next FOMC meeting, but that a red-hot CPI would prompt him to consider raising rates.

The focus this week is squarely on the US CPI report. Barring an unexpected development in US-Iran ties, price movements are expected to stay largely contained or slightly supportive for the dollar, as traders may begin positioning ahead of the CPI release.

A CPI reading that is soft or in line with expectations would probably weigh on the dollar, since Waller has indicated he would not contemplate a rate hike without an especially strong CPI. On the other hand, a higher-than-expected monthly core inflation figure would probably spark another dollar rally as markets price in a more hawkish stance.

EURO SIDE:

For the euro, the ECB is largely anticipated to raise rates by 25 basis points at its next meeting, taking the policy rate to 2.50%. This expectation was reinforced by "ECB sources", who indicated that the central bank is prepared to hike in September but has limited desire to indicate additional tightening beyond that.

Consequently, the market's current pricing of 44 bps of tightening by the end of the year may be inaccurate, and the euro could decline modestly if economic data begin to soften. However, for the time being, EUR/USD will be primarily influenced by the dollar, as that is where expectations are showing greater volatility.

DAILY TECHNICAL ANALYSIS

EUR/USD is consolidating above the support area near 1.1560. Should the price retreat again to that support, buyers are expected to enter with a clearly defined risk below that level, aiming for the 1.18 mark. Conversely, sellers are looking for a break below support to add to bearish positions targeting the key 1.14 support.

4-HOUR TECHNICAL ANALYSIS

Price action has been largely rangebound since the hawkish Warsh speech, with a few spikes resulting from Waller's remarks and the strong NFP data. As such, the 1.1660 level may serve as resistance, defining the 1.1560-1.1660 range. Buyers seek a breakout above resistance to fuel a rally toward 1.18, while sellers aim for a breakdown below support to set up a decline to 1.14.

1-HOUR TECHNICAL ANALYSIS

There is little additional insight to offer here, as the erratic price action is expected to continue until the US CPI is published.

UPCOMING DATA

Thursday's economic calendar includes the US PPI and weekly jobless claims. The week concludes on Friday with the US CPI release.