EUR/USD: China's CPI, Trump, and Xi

At the start of the new trading week, the EUR/USD pair is moving within the 5th figure's narrow range. Traders remain in a wait-and-see mode ahead of inflation reports in the U.S. (Wednesday-Thursday) and the European Central Bank's December meeting (Thursday). These events are expected to trigger significant volatility in the pair; the only question is whether it will favor buyers or sellers. Both bearish impulses and bullish price spikes should be viewed with equal skepticism.

The pair remains in limbo: on the one hand, there is potential for a renewed bearish trend, and on the other, there is a likelihood of a corrective rally, possibly toward the 7th figure. Given this crossroads of events, it's no surprise that traders are cautious, reacting weakly to the current flow of information. All intraday "ups and downs" of EUR/USD occur within a 60-pip price range.

During Monday's Asian trading session, key inflation data for November was published in China. The report fell into the "red zone," indirectly supporting the safe-haven dollar by increasing risk-averse sentiment. According to the data, the Consumer Price Index (CPI) dropped to 0.2% last month. This marks the third consecutive month of a downward trend: it fell to 0.4% in September (after rising to 0.6% in August), to 0.3% in October. In November, most experts predicted the index would recover to the September level (i.e., to 0.4%), but contrary to forecasts, it fell to 0.2% (the weakest growth rate since June of this year). The Producer Price Index (PPI) came in at -2.5%. Although slightly better than the forecast (-2.8%), it marked the 26th consecutive month of deflation in the manufacturing sector.

The data reflects weak consumer inflation growth in October and a sustained decline in industrial goods prices. Between October 2023 and January 2024, CPI was in negative territory. It turned positive in February, peaking at 0.6% in August, but has been steadily approaching zero since July.

Reacting to this release, EUR/USD hit an intraday low at 1.0533.

However, buyers took the initiative during the European session, pushing the pair to an intraday high of 1.0586. With an almost empty economic calendar (China's CPI report being the only significant release), traders focused on Donald Trump's statement that about three days ago, he "sent a message" to China's leader, and they are now "in contact." According to the U.S. president-elect, he has "very good" relations with Xi Jinping.

Given Trump's recent threats toward Beijing, this statement seemed conciliatory. At the end of November, Trump announced a plan to impose an additional 10% tariff ("on top of all other tariffs") on all Chinese imports if China failed to curb the flow of the opioid fentanyl into the U.S. Previously, Trump had threatened both Mexico and China with tariffs of up to 100% "if deemed necessary." He also warned that he would revoke China's most favored nation status in trade with the U.S.

Against this backdrop, Trump's remarks today appear "reconciliatory." However, in my opinion, the market is overly trusting. Trump's personnel decisions tell a different story—that he prepares for a trade war if preliminary negotiations fail.

In November, Trump announced the appointment of "Florida hawks" Waltz and Rubio to key foreign policy positions. For instance, his future national security advisor, Waltz, has previously called China an "existential" threat to the U.S. On Friday, it was revealed that Trump plans to appoint former Senator David Perdue, who has been highly critical of China, as ambassador to Beijing. Perdue, who served on the U.S. Senate Armed Services Committee and later the Committee on Foreign Relations, has advocated strengthening the U.S. Navy and other armed forces "to counter Beijing."

In other words, despite claims of friendly contact with Xi, it's clear that Trump is "keeping his powder dry" and remembers where "the hatchet is buried."

Trusting EUR/USD's current movements, whether upward or downward, is unwise. The pair trades within a narrow range, reacting reflexively to the ongoing information flow. Currently, no conditions exist for sustained price movement in either direction. The pair will likely remain in limbo until Wednesday when the U.S. releases the most critical inflation indicator—the CPI. In such uncertainty, adopting a wait-and-see strategy for EUR/USD is advisable.