EUR/USD bears eye a correction following high volatility induced US CPI

EUR/USD is headed into Tokyo's Friday open around the highs of the week which leaves the downside vulnerable for the day ahead with last week's low score around Nonfarm Payrolls vulnerable neat 0.9720. At the time of writing, the euro is trading around 0.9773 and is consolidating Thursday's volatility.

US CPI comes in hot

US inflation eased less than expected in September to 8.2%, and underlying prices excluding energy while food prices accelerated to a new four-decade high.

• US CPI (MoM) Sep: 0.4% (est 0.2%; prev 0.1%).
• US CPI (Y0Y) Sep: 8.2% (est 8.1%; prev 8.3%).
• US CPI Core (M0M) Sep: 0.6% (est 0.2%; prev 0.6%).
• US CPI Core (Y0Y) Sep: 6.6% (est 6.5%; prev 6.3%).

As a consequence of the data beats, the 10-year Treasury yield rallied to 4.080% while the 2-year yield was up to 4.535%. As measured by the DXY index, the US dollar fell by 1% to almost 112.14 as risk sentiment returned to markets. At the time of writing, the DXY index is flat having fallen from a high of 113.92 to a low of 112.147 on Thursday.

Investors are now pricing in 91% odds of a fourth straight 75-basis-point hike by the Fed at its meeting next month, with some also pricing in a 9% chance of a 100 bps rise. Moreover, there are the prospects of a 100 basis points increase in November that has also reared its head, though it's currently seen as unlikely, with only a 9% probability.  The bottom line, there are no chances of a near-term dovish pivot from the Fed.

The euro benefitted from a risk on rally on Wall Street but, the big question is; ''is the risk rally logical, or is it just a short squeeze or a dead cat bounce?'' The S&P 500 closed the session up 2.6% after declining 5.7% in the previous six sessions. Earlier Thursday it fell 2.3% to its lowest level since Nov. 2020. 

Domestically, European Central Bank policymakers have discussed earlier this month a detailed timeline for running down a 3.3 billion euro bond portfolio and envisioned the start of quantitative tightening sometime in the second quarter of 2023, sources told Reuters.

EUR/USD technical analysis

The price is homing in on a price imbalance to the downside towards 0.9725 from 0.98064 highs. This will be a key support area being the midpoint of the day's range and the highs and lows of the week so far. A break of 0.96332 could be key for a downside continuation to test last month's lows near 0.9540 while the highs guard risk to last week's highs near parity.