FOREX Fundamental analysis for EUR/USD on January 16, 2025
The first public statement by Scott Bessent, a candidate for the post of treasury secretary, that the United States should preserve the dollar's status as the world's reserve currency, instantly reversed the growth of EUR/USD observed after the release of inflation data in the United States. It seems that the administration of Donald Trump does not plan to significantly weaken the dollar, which creates room for further depreciation of the main currency pair.
At first glance, the data on the consumer price index (CPI) looked ambiguous. Annual inflation accelerated from 2.7% to 2.9%, while monthly inflation showed the best result in a year. However, the main contribution to the price increase was made by a 4% increase in gas prices. At the same time, core inflation decreased from 3.3% to 3.2% in annual terms and to 0.2% on a monthly basis, the slowest growth in the last six months.
The markets immediately reacted to this data: Treasury bond yields declined, stock indexes showed the best dynamics since the election of Donald Trump, and forecasts for the Fed rate were revised. The probability that the rate will remain unchanged in 2025 has dropped from 26% to 16%, and the probability of more than one reduction has increased from 35% to 50%.
Comments from FOMC representatives added volatility to currency pairs. John Williams, President of the Federal Reserve Bank of New York, confirmed the stability of the disinflationary trend. His colleague from the Federal Reserve Bank of Richmond, Thomas Barkin, said that the latest data confirms the movement of inflation towards the target level. Austan Goolsbee of the Federal Reserve Bank of Chicago noted that inflation dynamics continues to improve.
Against this background, the EUR/USD rally seemed logical. An increase in global risk appetite, lower yields and an increased likelihood of a resumption of the Fed's easing cycle supported the euro. In addition, speculators, amid rumors of the gradual introduction of import tariffs, began to reduce long positions in the dollar.
However, even if the Fed starts cutting rates, it will be slower than other central banks. ECB Chief Economist Philip Lane expressed concern about the possibility of deflation returning to the Eurozone, and ECB Vice President Luis de Guindos stated the priority of economic growth over the return of inflation to the target level, which indicates the continuation of the cycle of monetary policy easing by the European regulator.
The trader's trading plan for EUR/USD assumes that both the dollar and the euro have their weaknesses, which increases the likelihood of consolidation of the pair. However, if Donald Trump starts actively implementing his election promises, the EUR/USD bulls will have to retreat. The strategy of selling EUR/USD on growth with targets around 1.012 and 1 remains relevant.