FX.co ★ EUR/USD: the euro is flying, the dollar is depressed, and inflation rules the situation

The annual inflation report in the U.S. was a turning point for the EUR/USD pair. As a result, the greenback sharply fell and gave way to the euro, which took advantage of the situation and rapidly went up. In the future, experts expect the pair to stabilize and the relative balance in the dynamics of the key currencies.

On Tuesday evening, December 13, the U.S. Bureau of Labor Statistics released data for November, according to which the inflation rate in the country as measured by the Consumer Price Index (CPI) fell to 7.1% annually in November, down from 7.7% in October. The November CPI headline rate marked the fifth-straight monthly decline and was better than economists' expectations of 7.3%. On a month-to-month basis, prices rose by 0.1% last month, as compared to October's reading of 0.4%.

Core CPI, which excludes the volatile food and energy categories, increased by 0.2% in November on a monthly basis. At the same time, experts had expected an increase of 0.3% m/m. Core CPI measured 6% for the year ended in November, although it was expected to increase by 6.1% y/y. At the same time, the annual growth rate of inflation was the lowest reading since December 2021.

According to currency strategists at Commerzbank, weakening inflationary pressures will push the Federal Reserve to slow the pace of interest rate hikes. The bank believes that after the CPI data, a 50 bps hike in the Fed's rate is a settled issue. According to analysts, in early 2023, the central bank will pause in the process of aggressive rate hikes. Commerzbank expects no more than two rate hikes of 0.25% in February and March next year. Thus, most currency strategists believe that the Fed's rate hike cycle might come to an end soon, by the end of 2023.

In the current situation, many experts expect the central bank to slow down the pace of rate hikes to a range of 4.25%-4.5% amid strong macro data from the US. Moreover, the results of the Fed meeting will provide updated projections. The central bank's monetary strategy will be outlined by Fed Chairman Jerome Powell whose press conference will be held on Wednesday, December 14. Investors are waiting for the Fed's signals regarding the monetary policy and the analysis of the economic situation.

The current situation has shaken the dollar's position significantly. The greenback has sharply fallen after the US inflation reports, giving way to the euro. In this backdrop, the single currency spread its wings and broke through almost all the barriers, rising from multi-day lows. Before the report, EUR/USD was near 1.0556. Later, the pair soared by 1% to an impressive 1.0649 amid a surge in investor activity and massive stop-losses. On Wednesday morning, December 14, the EUR/USD was trading at 1.0641, trying to hold on to its gains.

Despite expectations of dovish decisions from the Fed, some analysts are skeptical about a possible rollback of aggressive rate hikes. They believe it is premature to rely on the end of the tightening cycle by the U.S. and other central banks. It is too early to celebrate victory over inflation, so one should not pin unreasonable hopes on the Fed, the ECB and other central banks, experts said.