EUR/USD Consolidates Ahead of Key Inflation Data: How to Trade It

The beginning of the year has seen minimal changes in the overall strength of the US labor market.

Initial readings for the new year exceeded expectations for both new nonfarm payrolls and the unemployment rate.

Despite this positive outlook, recent signals from the Federal Reserve make it clear that a cycle of interest rate cuts is imminent; the only uncertainty lies in the timing of the first move.

A pivotal indicator to watch this week is the inflation data for December in the U.S. If, in line with forecasts, it will likely indicate a slowdown in disinflation, struggling to breach the 3% year-on-year barrier.

The U.S. labor market remains a source of optimism for the Federal Reserve, with the latest data, released on Friday, revealing an increase in new nonfarm payrolls to 216,000 and the unemployment rate maintaining levels below 4%.

Economic Calendar

Source: Investing.com

However, this optimistic picture is disturbed by further downward revisions of all months in the August-November period. This is because the data are coming in gradually, even with a delay of several months.

Despite this, the strength of the labor market can be considered extremely surprising for the largest monetary tightening in the US in many decades.

Optimistic data from the labor market, combined with positive readings of economic growth dynamics measured through GDP, make the so-called soft landing scenario a real possibility.

However, we are still a long way from declaring full success, although if subsequent quarters confirm this development it will be a very positive long-term signal for stock markets.

At the moment, the probability of interest rate cuts in March has fallen somewhat, however, it is still slightly above 60%.

Inflation in the US stuck above 3%

Since last July, when the y/y inflation rate reached 3%, we have seen a stabilization of the rate in the range of 3-4%.

The readings for December imply a continuation of this sideways trend, which confirms that the last stage of reaching the inflation target is the most difficult when the high base effect-based boost is no longer available.

US Inflation Data

Based on the Fed minutes, As the cycle of interest rate cuts begins, it becomes apparent that the focus is shifting away from the battle against inflation.

The primary objective now seems to be steering clear of pushing the economy into a recession.

This means that the labor market, industrial production dynamics, and GDP should become increasingly important, and depending on the next readings the pace of monetary easing will be adjusted.

EUR/USD consolidates: A pause before the next push upward?

After the release of Friday's data from the US labor market, EUR/USD failed to determine a specific direction and is stuck in a local consolidation.

A possible upside breakout will be a very important pro-growth signal indicating the possibility of initiating another demand wave.

EUR/USD Daily Chart

The potential breakout aligns with the ongoing trend and is a reflection of the continued depreciation of the US dollar, driven by the diminishing possibility of the Federal Reserve initiating interest rate cuts as early as March.

Buyers' initial target lies within the supply zone around the price level of 1.12, established based on this year's highs. Conversely, a break of the local trend line is anticipated to extend the unwinding, reaching at least the vicinity of 1.0750.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counseling or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. As a reminder, any type of asset is evaluated from multiple perspectives and is highly risky, and therefore, any investment decision and the associated risk remains with the investor.