EUR/USD is holding in a tight range as traders wait for Friday's US CPI report to set the next major move. A hot inflation print would likely trigger a hawkish repricing and further dollar gains, while a soft or in-line reading would likely weaken the greenback.
Dollar fades its NFP spike, turns to CPI
The US dollar spiked higher on Friday after the US NFP report showed job growth in August almost tripling the consensus estimate of 56K, but the gains didn't last. Most of the NFP-driven move got faded afterward, because the market's attention was already shifting to this week's inflation data.
The Federal Reserve is currently focused on inflation, so traders are pricing off the data the central bank watches most closely. A day before the NFP report, Fed's Waller said he would support keeping interest rates unchanged at the upcoming FOMC meeting, but added that a hot CPI would make him consider a rate hike.
Rangebound price action until Friday
Barring a surprising breakthrough in US-Iran relations, price action will likely stay mostly rangebound or a bit positive for the dollar this week, as traders may start hedging into the CPI release.
A soft or in-line CPI would likely weaken the dollar, since Fed's Waller has said he won't consider a rate hike unless the data comes in hot. Conversely, an upside surprise in core monthly inflation would likely trigger another rally on a hawkish repricing.
ECB seen hiking, but euro side plays second fiddle
On the euro side, the ECB is widely expected to hike rates by 25 basis points at its upcoming meeting, bringing the policy rate to 2.50%. ECB sources also said the central bank has little appetite to signal further tightening afterward.
That leaves current market pricing of 44 basis points of tightening by year-end open to being mispriced, and the euro could suffer a little if economic data starts weakening. Still, EUR/USD will be driven mainly by the dollar side for now, since that's where expectations are moving most.
Technical levels to watch
On the daily chart, EUR/USD is consolidating above support around the 1.1560 level. A pullback into that support could draw buyers targeting the 1.18 handle, while a break lower would open the door to the major 1.14 support. On the four-hour chart, the 1.1560-1.1660 range has held since the hawkish Warsh speech, with spikes tied to Waller's comments and the strong NFP report.
Thursday brings the US PPI report and jobless claims figures, before the week concludes with Friday's CPI release.
Source: Investinglive
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