The highlight for the week in the Eurozone will be the flash CPI for December. If Germany’s preliminary CPI is any indication of what to expect for the Eurozone, it could be softer as the print was 8.6% YoY vs and expectation of 9.1% YoY and a 10% reading in November. This was the first drop into single digits for Germany’s inflation reading since August. Expectations for the Eurozone headline print are for a drop to 9.7% YoY from 10.1% YoY in December. This would bring the headline print below 10% for the first time since October. The core inflation rate is expected to remain unchanged at 5% YoY. At the December ECB meeting, Christine Lagarde said that it is “obvious that we should expect 50bps hikes for a period of time”, and she mentioned the possibility of 3 more 50bps rate hikes. However, if inflation continues to slow, will the ECB need to hike an additional 150bps with a recession looming? The current deposit rate sits at 2.5%. In addition to the CPI, the Eurozone will also release Retails Sales on Friday for November. Expectations are for the print to increase to 0.5% MoM vs a prior reading of -1.8% MoM. This would only be the second positive print since April!
There will be two macroeconomic events that could drive market action in the US this week. The first is the FOMC Minutes from the December meeting. Recall that Powell was hawkish at the meeting, with the Fed dot plots showing a median terminal rate of 5.1% for Fed Funds. The current rate is 4.5%. In addition, the statement noted that ongoing rate increases are “likely appropriate”, and committee does note see a rate cut in 2023. In addition, during the press conference Powell noted that it will take substantially more evidence to give confidence that inflation is on a sustained downward path. Markets will be watching to see if the overall tone of the meeting was indeed hawkish and if any of the members discussed the ramifications of a possible recession later this year. The second event that could move the markets is the Nonfarm Payroll Report for December, due out on Friday. Current expectations are for a print of +200,000 vs a November print of +263,000. The Unemployment Rate is expected to remain unchanged at 3.7%. Average Hourly Earnings will be closely watched as well to see if wages are still rising with inflation. Expectations are for a print of 0.5% MoM vs a previous reading of 0.6% MoM.
Since December 15th, 2022, EUR/USD has been relatively quiet, maintaining a range between 1.0584 and 1.0736 for the last 2 weeks of 2022. However, on Tuesday, the pair has formed a daily range of 164 pips while taking out the range lows, reaching 1.0519. Leading into the end of the year, the pair had been moving higher as it retraced to the 61.8% Fibonacci retracement level from the highs of February 2022 to the lows of September 2022, near 1.0747. Price was capped there, and EUR/USD moved lower to start 2023.
Source: Tradingview, Stone X
On a 240-minute timeframe, first support for EUR/USD is at the lows from December 7th, 2022, at 1.0443. Below there, long-term horizontal support crosses at 1.0348/1.0360 and then again at the November 30th, 2022 lows of 1.0349. However, if EUR/USD bounces, the first resistance is at the lows from January 2nd at 1.0650 and then the highs of December 15th, 2022 at 1.0736. Above there, price can move to the highs from May 30th, 2022 at 1.0786.
Source: Tradingview, Stone X
With inflation data and Retail Sales from the Eurozone, along with the jobs data from the US, EUR/USD has the potential to be volatile this week. Don’t forget that it’s also the first week of the year. Therefore, money managers may need to “put money to work” and get into positions, which can cause further volatility! Manage risk accordingly!