Post US CPI Rises EUR/USD to 9-Month Peaks Above 1.0800

The EUR/USD currency pair saw its upside accelerated to levels last seen in April 2022, north of 1.0800, on Thursday. This was a result of the increasing selling pressure on the dollar, particularly exacerbated following the release of US inflation figures during December. The headline Consumer Price Index (CPI) rose at an annualized 6.5% in December and 5.7% YoY when it comes to the Core CPI, which excludes food and energy costs. This retreat for the sixth consecutive month so far adds to the rising perception of the Federal Reserve's pivot in the not-so-distant future.

Post US CPI Rises EUR/USD to 9-Month Peaks Above 1.0800

In the wake of the publication of the US CPI, the probability of a 25 bps rate hike at the next Fed event climbed to 82% according to CME Group’s FedWatch Tool. Additionally, Initial Jobless Claims rose 205K in the week to January 7, surpassing consensus.

The price action around the European currency continues to closely follow dollar dynamics, as well as the impact of the energy crisis on the region and the Fed-ECB divergence. However, there are some important domestic headwinds facing the euro in the short-term horizon. The increasing speculation of a potential recession in the bloc emerges as an important domestic headwind facing the euro in the short-term horizon. Some key events in the euro area this week include France final Inflation Rate, Germany Full Year GDP Growth, and MEU Balance of Trade/Industrial Production (Friday).

Eminent issues on the back burner include the continuation of the European Central Bank's hiking cycle vs. increasing recession risks, the impact of the war in Ukraine, and the protracted energy crisis on the region’s growth prospects and inflation outlook, and the risks of inflation becoming entrenched.