All eyes on the US inflation data

European equity futures declined due to rising concerns that US President-elect Donald Trump’s proposed tariffs and selections for key administration posts could increase inflation.

Equity benchmarks in Japan and Hong Kong declined, while a measure of Asian shares reached its lowest point since September 13. US stock futures also fell. The Yen weakened beyond 155 per dollar for the first time since July, increasing the likelihood that Japan may intervene in the currency market to curb depreciation.

The Bloomberg Dollar Spot Index increased along with Treasury yields as traders awaited a report on US consumer price inflation. Currently, traders are anticipating approximately two rate cuts by the Federal Reserve by June, a shift from nearly four rate cuts expected at the beginning of last week.

Inflation may rise

US inflation likely remained stable at best in October, indicating a slow and uneven decline in price pressures as we approach the Federal Reserve’s target. The Core Consumer Price Index (CPI), which excludes food and energy prices, is expected to have increased at the same rate on both a monthly and annual basis compared to the figures from September.

Overall, the CPI likely rose by 0.2% for the fourth consecutive month, while the year-over-year measure is anticipated to have increased for the first time since March.

Federal Reserve Bank of Minneapolis President Neel Kashkari stated that he will examine incoming inflation data to assess whether another interest rate cut is warranted at the US central bank’s meeting in December.

Yen intervention soon?

The Yen has weakened beyond 155 per dollar for the first time since July, increasing the risk that Japan will intervene in the currency market to curb its depreciation. The Japanese currency fell by as much as 0.4%, reaching 155.15 against the dollar, continuing to decline after Donald Trump’s re-election as US president.

The rise in Treasury yields is putting pressure on the Yen, with the two-year yield hitting its highest level since July. This decrease in the Yen’s value is approaching the levels at which Japanese authorities last intervened to support the currency. Japan’s top foreign exchange official has expressed concerns about sudden and one-sided market movements.

According to a Bloomberg survey of 53 economists conducted last month, the minimum forecast for the Yen that could prompt government intervention is 150 against the dollar, with a median estimate of 160.

ECB is likely to cut rates further

Martins Kazaks, a member of the European Central Bank’s (ECB) Governing Council, believes the bank should continue to gradually cut interest rates. He stated, “The current base scenario—one that I find most appropriate—is to keep lowering rates step by step. The trend for rates is downward, but this will depend on the state of the economy and what developments occur within it.”

The ECB has already reduced borrowing costs three times since June and is anticipated to make another cut at its final policy meeting of the year in December.

EURUSD trying to hold above 1.06

The Euro has continued its decline since the day of the US elections, reaching its lowest level in a year against the US dollar. It is currently trying to hold above the key support level of 1.06, which should be monitored closely in the coming hours.

Despite the sharp drop and the shift in expectations regarding the Fed’s rate cuts, traders should be cautious about rushing to short the Euro when it is at a one-year low. There remains a risk of a bounce back towards 1.08, especially since the technical indicators are oversold across most timeframes.

DXY facing strong resistance

The US Dollar has been on an impulsive rally, attempting to break above the 1.06 mark. However, with technical indicators showing extreme overbought conditions. A downside retracement may be looming.

For this week, the 1.06 level is crucial. Even if the index manages to surpass 106.0 by the week’s end, it would not be wise to pursue further gains at that point. A short-term pullback is necessary before considering joining the dollar rally.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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