Euro Is Waiting for U.S. Inflation to Slow Down

The U.S. Dollar Index (DXY) is up 0.19% this week, reaching 106.27 points, while the EURUSD pair is down 0.20% to 1.05370. The pair has repeatedly failed to break above the 1.05400-1.05600 resistance zone. However, its continued higher lows suggest an "ascending triangle" pattern, often indicative of a potential upside breakout. While this is worth noting, the situation remains inconclusive for now.

The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) showed neutral capital flows last week after $7.0 million in net inflows the previous week, signaling that large investors remain cautious, likely awaiting a decisive move. A breakout above last week’s highs at 1.06000-1.06200 could provide such a signal. On the macroeconomic front, softer-than-expected U.S. inflation in November or moderately hawkish remarks from the European Central Bank (ECB) this week could serve as catalysts for the pair’s upside.

The U.S. Consumer Price Index (CPI) for November will be released on Wednesday, with analysts forecasting an increase to 2.7% from 2.6%. However, lower figures are possible given a 2.5% decline in oil prices last month. Meanwhile, the ECB is anticipated to cut interest rates by 25 basis points, a move already priced into the market. Declining German 10-year debt yields throughout November and the Eurozone’s inflation rise to 2.3% YoY from 2.0% could prompt ECB President Christine Lagarde to strike a moderately hawkish tone, potentially boosting the euro.

If these developments fail to push EURUSD above the 1.05200-1.06200 resistance, attention will shift to the Federal Reserve meeting on December 18. The Fed is widely expected to cut interest rates by 25 basis points, with an 89.5% probability priced in. Markets will scrutinize any comments from Fed policymakers for guidance on future policy.

U.S. President-elect Donald Trump has confirmed that Jerome Powell will remain Fed Chair, signaling continuity in the monetary easing cycle. Powell’s stance could become even more dovish if November inflation underperforms expectations, potentially sparking a Santa Claus rally and weakening the U.S. Dollar further.