EUR/USD retreated sharply from a six-month high touched after the ECB decision on Thursday. The risk-off impulse prompted short-covering around the safe-haven USD and exerted pressure. The pullback lacks any follow-through selling amid a more hawkish stance adopted by the ECB. Traders now look to the release of flash PMIs from the Eurozone and the US for a fresh impetus. The EUR/USD pair witnessed good two-way price swings on Thursday and finally settled near the lower end of its daily range, retreating nearly 150 pips from a six-month top. The shared currency strengthened across the board after the European Central Bank (ECB) delivered a widely anticipated 50 bps rate hike, taking its key rates to the highest level since 2008. In the accompanying policy statement, the ECB struck a hawkish tone and indicated that it will need to raise borrowing costs significantly further to tame inflation. The central bank noted that inflation remains far too high and is projected to stay above the target for too long. Based on new economic projections, inflation is expected to reach 8.4% in 2022, then ease to 6.3% in 2023, 3.4% in 2024, and 2.3% in 2025. Core inflation, excluding energy and food, is projected to be at 3.9% in 2022, 4.2% in 2023, 2.8% in 2024, and then fall to 2.4% in 2025. The ECB also said that it will begin to reduce its balance sheet by €15 billion per month on average from the beginning of March 2023. The impact was immediately felt by the Eurozone's weakest borrowers, pushing the yield on Italy's 10-year bonds higher by 31 bps - the biggest single-day change since March 2020. This, along with looming recession risks, acted as a headwind for the Euro. Apart from this, a solid intraday US Dollar recovery from its lowest level since June 10, bolstered by a combination of factors, contributed to capping the EUR/USD pair. The Fed on Wednesday signalled that it will continue to raise rates to crush inflation. In fact, the so-called dot plot projected at least an additional 75 bps increase in borrowing costs by the end of 2023 and the terminal rate rising to 5.1%. This, along with a fresh wave of the global risk-aversion trade, provided a strong boost to the safe-haven buck. The prospects for further policy tightening by major central banks added to worries about a deeper global economic downturn and weighed on investors' sentiment. The EUR/USD pair attracted aggressive selling near the 1.0735 region, though showed resilience below the 1.0600 mark. As the post-Fed/ECB volatility subsides, spot prices manage to regain some positive traction during the Asian session on Friday and climb back to mid-1.0600s. The market focus now shifts to the release of flash PMI prints from the Eurozone and the US. Apart from this, the broader risk sentiment will drive the USD demand and allow traders to grab short-term opportunities on the last day of the week. Technical Outlook From a technical perspective, the EUR/USD pair, so far, has been struggling to find acceptance above the 1.0700 mark. Adding to this, the overnight sharp intraday pullback could be seen as the first sign of possible bullish exhaustion. Furthermore, oscillators on the daily chart have moved on the verge of breaking into overbought territory. That said, the emergence of some dip-buying on Friday warrants some caution before confirming that spot prices have topped out. The mixed technical setup points to some near-term consolidation ahead of the year-end holiday season. In the meantime, a convincing break below the 1.0600 mark might prompt some technical selling, though any subsequent fall could attract some buyers near the 1.0550-1.0545 region. The next relevant support is pegged near the 1.0520 region, which is closely followed by the 1.0500 psychological mark. Some follow-through selling below the latter might expose the 1.0400 horizontal resistance breakpoint and a technically significant 200-day SMA, currently near the 1.0345-1.0340 zone. On the flip side, the 1.0680-1.0685 region now seems to act as an immediate hurdle ahead of the 1.0700 mark and the overnight swing high, around the 1.0735 area. Bulls need to wait for a sustained strength beyond the latter before positioning for any further gains. The EUR/USD pair might then accelerate the momentum towards reclaiming the 1.0800 mark, with some intermediate resistance near the May 2020 peak, around the 1.0785 level.

Risk assets are looking heavy as the week gets set to close out. The primary catalyst comes from this week's Fed decision which leaned more hawkish on the revelation the central bank expects the terminal rate to rise above 5%.

Outlook: The calendar today has retail sales, the usual jobless claims, two regional Fed surveys (NY and Philly), plus industrial production and business inventories. Analysts will parse the jobless claims but the real winner will be retail sales. So far the consumer is spending nearly as usual, if not a little more. At what point does that show a retreat? Again, if Chinese factory output (and port and shipping capability) falters, the American consumer faces shortages and higher prices next year–but will that inspire restraint? The cat laughed.   The dollar got sold off again on the Fed story, evidence that once again the markets and the Fed are not marching to the same drummer. The Fed said higher for longer and the CME FedWatcher tool showed a drop in the expected rates for next year, especially May, which shed 10 points. The yield curve steepened even as the Fed was forecasting positive growth all next year–only 0.5%, less than before, but not a recession. And yet all the big cheeses at the big banks foresee recession.   The message was very clear the battle has not been won, even if hiking is decelerating. Everyone expects two more hikes next year of 25-50 bp each to an ending rate of 5.1%. You’d think that would inspire some dollar buying, but as of the close yesterday, the charts didn’t back up that theory. A Bloomberg survey says 56% see a stronger dollar and a lower S&P. Since the 112 persons surveyed are named “investors,” they presumably have a stock market orientation. A hefty 44% say they were surprised by how adamant the Powell sounded about not being done--“We still have some ways to go.” Mostly they were shocked by the new ending rate at 5.1% not expected to go down to 4.1% until 2024. As always, Powell said the Feb policy meeting will be data-dependent. As for that fictitious pivot we have been scornful about, ““I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way. Restoring price stability will likely require maintaining a restrictive policy stance for some time.”   In case you missed it, Powell also said “It is our judgment today that we are not at a sufficiently restrictive policy stance yet. We will stay the course until the job is done.” The Fed believes that taming inflation absolutely, positively needs unemployment to rise in order for wage increases to moderate. No slack in the labor market, no wage relief. That means the unemployment rate next year has to go to 4.6% from 3.7% in November. We have doubts. The labor shortage is real and rising wages are not, so far, fixing it.   We have doubts about the Fed’s inflation forecast for next year, too–3.1% and falling to 2.5% in 2024, the earliest they can start, maybe, cutting rates. That is overly optimistic and assumes energy prices in the US remain tame, the war in Ukraine doesn’t make conditions any worse, the consumer gets the message to exercise spending restraint (ha), the government doesn’t overspend, price gougers relent, all supply chain issues magically vanish, and China doesn’t shut down again because of Covid.   Note that food and housing are the tow biggest components of rising inflation. Food still has rising prices. House prices may be stabilizing and even falling, which could give a false sense of improvement. And as always, the price of oil looms over everything.   If all the ducks line up to show inflation falling some more, we will get another dose of the market’s view that halting hikes and starting cuts will come sooner than Powell is saying. They seems to think inflation will come down faster and to lower levels than the Fed, and they are sticking to the 2023 pivot idea with sticky hands.   Nobody much is comparing rates in the various places, especially the ending rates. The US has a terminal rate expectation of 5.1%. The UK is at 3.5%, with 1% more expected, so a terminal rate of 4.5%. The ECB, assuming it does 50 bp today, has another 75 bp to go, ending with 2.75% next year. To be fair, the ECB is doing more TE per month than the US, and that has the same effect as some amount of tightening. The US expects a soft landing–no recession, if by the skin of our teeth, but both the UK and Europe are expected to enter recession, if they haven’t already.   Given this picture, why is the dollar soft? It doesn’t make sense. Opinion about the dollar’s futures is divided. Some say logic is always good, let’s go with a stronger dollar. Others say the soft landing is a fiction, let’s assume a...

Annual CPI in the US is forecast to decline to 7.3% in November. Core CPI is expected to edge lower to 6.1% from 6.3%. A soft inflation report could feed into 'Fed pivot' narrative. The US Bureau of Labor Statistics will release the Consumer Price Index (CPI) figures for November on Tuesday, December 13. The US Dollar has been having difficulty staying resilient against its rivals since mid-October. The inflation report ahead of the year's last Federal Reserve policy meeting could significantly impact the currency's valuation. On a yearly basis, the CPI is forecast to decline to 7.3% and the Core CPI, which excludes volatile food and energy prices, is expected to edge lower to 6.1% from 6.3%. On a monthly basis, the Core CPI is projected to match October's print of 0.3%.  The monthly Core CPI will likely be the figure that market participants will pay the most attention to because it will not be distorted by the base effect. Additionally, it will not reflect the more-than-6% decline witnessed in crude oil prices in October. In case monthly Core CPI in October arrives at 0.5% or higher, investors are likely to reinstate their US Dollar longs with anticipation that this data could cause Fed policymakers to pencil down a higher-than-5% terminal rate even if they vote for a 50 basis points rate hike on Wednesday. On the other hand, a reading of 0.3% or lower should feed into the 'Fed pivot' narrative and trigger a US Dollar sell-off. Although FOMC Chairman Jerome Powell is likely to continue to push back against the market expectation for a policy reversal via rate cuts in 2023, a soft monthly CPI for the second straight month could revive optimism about inflation having peaked in the US. Hence, some policymakers could see lower inflation in 2023 in the Summary of Projections (SEP) and refrain from projecting a terminal rate of higher than 5%. It's worth noting that even if the US Dollar comes under renewed selling pressure on a weak CPI print, the Euro and Pound Sterling could struggle to capture the capital outflows amid uncertainties surrounding the European Central Bank (ECB) and the Bank of England's (BoE) policy decisions, which will be announced on Thursday. In that scenario, Gold price could be the main beneficiary due to its inverse correlation with the benchmark 10-year US Treasury bond yield. USD/JPY could also show a strong reaction and fall sharply on growing expectations about the Bank of Japan (BoJ) finally looking to exit from its ultra-loose policy. On the flip side, a hot inflation report is likely to weigh heavily on both EUR/USD and GBP/USD. Gold Price technical outlook XAU/USD's short-term technical outlook paints a bullish picture with the Relative Strength Index (RSI) on the daily chart holding comfortably above 50. The fact that the daily RSI also stays below 70 suggests that the pair has more room on the upside before turning technically overbought. Furthermore, the 200-day Simple Moving Average (SMA) stays intact at around $1,790, confirming sellers' unwillingness to commit to an extended decline for the time being. With a soft inflation report, Gold price could target $1,830 (Fibonacci 50% retracement of the long-term downtrend) and $1,860 (static level) next. On the other hand, $1,780 (Fibonacci 38.2% retracement) could be tested with a strong monthly Core CPI print before $1,770 (static level, 20-day SMA).

Stocks have taken the US PPI data relatively calmly, and hopes of a year-end rally are no doubt playing a part in this, says Chris Beauchamp, chief market analyst at online trading platform IG. China hopes prop up FTSE 100 “China’s reopening has a long way to go, but it has been enough this week to provide a hope of improvement in the outlook. The FTSE 100 has seen some benefit from that today, edging back up after falling to a one-week low. IHG’s 3% rise on hopes of more good news from China has helped that move, helping to steady the index and put it on course for a move up towards 7600 as the year heads to its close.” Stocks hold firm despite US inflation figures “While US factory-gate inflation points towards the need for still more rate rises, stocks can now scent the potential for a rally into the end of the month. Such a bounce would repair more of the damage suffered in 2022, even if the post-Christmas blues do set in. The PPI data was unable to have much of a negative impact, although it does set us up for another hot CPI figure and hawkish Fed next week which might be much harder for markets to navigate successfully.”

The US Oil crashed and erased yesterday’s minor gains. Now, it was trading at 72.31 at the time of writing. The bias remains bearish despite temporary rebounds. It could only test and retest the immediate resistance levels before dropping deeper. Crude Oil tried to rebound only because the US Crude Oil Inventories came in at -5.2M versus -3.5M expected. Today, the US PPI, Core PPI, and the Prelim UoM Consumer Sentiment could have an impact.