This week is crucial for EUR/USD traders, as key U.S. inflation data will be released shortly. These reports will not only influence the outcome of January's Federal Reserve meeting—an event that is largely anticipated—but will also impact the March meeting. Strong Non-Farm Payroll data from last Friday suggests that the Fed may adopt a wait-and-see approach in March. However, there is still a degree of uncertainty in the market. According to the CME FedWatch tool, the probability of a pause in January is 95%, but the likelihood of a pause in March stands at only 58%. Inflation reports could sway the decision towards maintaining the current stance, but only if the data meets forecasts or falls within the "green zone."
Tuesday, January 14: Producer Price Index (PPI)
The U.S. Producer Price Index (PPI), which has shown an upward trend recently, is set to be published. Forecasts indicate that this trend will continue to favor the dollar bulls. The headline PPI for December is anticipated to rise to 3.1% year-over-year, marking the highest level since March 2023. On a monthly basis, the index is projected to increase by 0.5%, following the upward trajectory observed in October and November, which suggests a solid trend.
The core PPI, which has remained stable at 3.4% year-over-year for the past two months, is expected to hold steady at that level in December.
Wednesday, January 15: Consumer Price Index (CPI)
The key macroeconomic report of the week, the CPI, is set to be released. Preliminary forecasts indicate that the headline CPI will rise by 0.4% month-over-month, which would be the highest increase since March 2024, and by 2.9% year-over-year, the highest since July 2024. The CPI has been showing upward trends for two consecutive months (October and November), and December is projected to continue this trend.
The core CPI, which has remained steady at 3.3% for the past three months, is expected to either rise to 3.4% or stay the same, according to analysts.
The preliminary inflation forecasts are disappointing for the Federal Reserve. If the CPI and PPI come in at the predicted levels—let alone within the "green zone"—the dollar will likely experience significant support. In this scenario, the expected date for the first interest rate cut in 2025 could be pushed back to at least May.
However, the economic calendar for the upcoming week includes more than just these two reports. These releases are the most critical as they will influence trading across all dollar pairs, including EUR/USD. We will also highlight other significant currency pairs for traders.
Monday
At the beginning of the trading week, it's important to pay attention to news from China, particularly regarding the release of foreign trade indicators.
During the American trading session, the monthly report on the execution of the US budget will be released. This report outlines the difference between budget revenues and government expenditures. While it serves as a macroeconomic indicator, it is typically considered secondary and often overlooked by the market.
Tuesday
On this day, the previously mentioned PPI index will be released, and it is the most significant economic indicator to be published on Tuesday.
During the American session, the RealClearMarkets/TIPP Economic Optimism Index will also be released. However, this index will primarily impact the currency pair only if there is a significant deviation from the forecast level. A slight increase is expected, rising from 54.0 to 55.1. Nevertheless, this report will likely remain overshadowed by the PPI, which is expected to provoke volatility in the markets.
Additionally, on Tuesday, John Williams, the head of the New York Fed, is scheduled to speak. His comments may touch upon the upcoming December Nonfarm Payrolls and the producer price index, as the inflation report will be available before his speech. During his last public statement in December, he mentioned that the central bank would consider another rate cut when the risks to inflation and employment become more balanced. If he adopts a more hawkish stance and raises doubts about the feasibility of monetary easing in the near future, the dollar may receive additional support.
Wednesday
The CPI report will be released on Wednesday, making it the central event of the day. On the same day, the Fed will also publish its monthly economic survey by region, known as the Beige Book. Additionally, the Empire Manufacturing Index, which gauges the economic health of the manufacturing sector in New York State, will be released. After a minimal increase of 0.2 in December, a decline to -0.3 is expected for this report. For context, the indicator rose to 31 points in November.
Furthermore, several Fed officials will speak on Wednesday, including Thomas Barkin, Neel Kashkari, Austan Goolsbee, and John Williams.
Thursday
The minutes from the December meeting of the European Central Bank (ECB) will be released. During this meeting, the ECB cut interest rates by 25 basis points and indicated that further cuts may follow. If the minutes reveal that ECB members are mainly focused on the weakness of the European economy rather than on rising inflation, it could create additional downward pressure on the euro.
In the American session, data regarding the weekly growth of initial unemployment claims will be published. Last week, this figure dropped to 201,000, marking the lowest level since January 2024. Forecasts predict an increase to 210,000 by the end of next week. However, if the number unexpectedly falls below the 200,000 mark, the dollar may strengthen significantly. This potential drop could have both psychological effects and reinforce a downward trend, as it would indicate a decrease for the fourth consecutive week.
An important release on Thursday is the US Retail Sales Report. Total retail sales are expected to increase by 0.6%, following a 0.7% increase in the previous month. When excluding transportation, an increase of 0.5% is anticipated, compared to a 0.2% rise in the previous month.
Additionally, another inflation indicator, the import price index, will be published on Thursday. While this is a secondary indicator, it can still provide valuable context. In December, it is expected to show an upward trend, increasing by 1.4% year-over-year, following a 1.3% rise in November and a 0.6% increase in October.
Another important release on Thursday is the Philadelphia Fed Business Activity Index. This indicator has been negative for the past two months, reaching -16 points in December. Positive dynamics are anticipated for January, with expectations of a rise to -7.0. However, the release will only bolster the dollar if it unexpectedly moves out of the negative zone.
Friday
On Friday during the Asian session, important data regarding China's economic growth for the fourth quarter of 2024 will be released. It's worth noting that in the third quarter, China's GDP grew by 4.6%, falling short of the government's target of 5%. Forecasts suggest that the GDP will still hover around the 5% mark in the fourth quarter. If the report comes in below expectations, the dollar may gain support as a safe-haven asset amid increasing anti-risk sentiment.
During the American session on Friday, the US will publish data on the volume of construction permits issued, with further growth expected to reach 7.4%. Additionally, data on industrial production will be released, with expectations for the indicator to rise out of the negative zone to approximately 0.3%.
Conclusions
This will be a busy and volatile week. If U.S. inflation accelerates and Fed members adopt a more hawkish tone, EUR/USD sellers could push the pair deeper into the 1.0X range, bringing parity within reach.
The current fundamental backdrop supports further downside for EUR/USD. Even if CPI and PPI meet expectations, corrective pullbacks remain opportunities to open short positions, targeting 1.0230 (lower Bollinger Band on the D1 timeframe) and 1.0170 (lower Bollinger Band on the W1 timeframe).
