EUR/USD hovering above mid-1.1500s ahead of US inflation data and central bank speak

EUR/USD is trading flat in the 1.1570 region, having remained supported above 1.1550, ahead of Monday’s US trading session's start amid broadly contained FX market conditions. The pair largely ignored a slightly better than expected survey of investor confidence for November (the Eurozone Sentix survey); the headline index rose to 18.3 from 16.9 in October as expectations built that supply chain disruptions which have severely hampered Eurozone manufacturing in recent months would start abate in the coming months. After a flurry of central bank activity last week that saw the Fed announce (as expected) its QE taper plans, ECB policymakers push back more firmly against money market pricing for rate hikes in 2022 and the Bank of England wrong-foot investors as it opted not to hike interest rates by 15bps, as well as the release of the US labour market report on Friday, this week is likely to be calmer.

Week Ahead

That’s not to say that there aren't key risk events to keep an eye on. Monday sees a number of FOMC members hit the wires; Fed Chair Jerome Powell at 1530GMT, though given the topic of his speech is diversity, he is unlikely to speak on monetary policy. But NY Fed President Williams will speak at 1530GMT, FOMC member Michelle Bowman will speak at 1700GMT and FOMC member Charles Evans at 1850GMT. Focus will switch from central bankers to inflation on Tuesday and Wednesday, with the release of the October Producer Price Inflation and October Consumer Price Inflation reports. The median economist forecast for the headline CPI rate is 5.8%, up from 5.4% in September, as food prices rise, used-car prices pick back up again and inflationary pressures in housing costs continues to build.

Fed policymaker Ester George sounded hawkish last week, saying the argument for patience had diminished given that the labour market is very tight and inflation is high. The comments could be interpreted as her being open to an accelerated pace of QE taper at the start of next year (from the current $15B/month rate in November and December announced by the Fed last week) that could pave the way for earlier rate hikes. It will be worth watching whether other Fed members agree and whether hot US inflation continues to support her more hawkish view. Another data point worth watching that should support the view of the US labour market being very tight is the release of the September JOLTs report on Thursday, which should continue to show that the number of job vacancies in the US is significantly more than the number of unemployed persons.

USD STIR markets currently fully price a first Fed hike by September 2022, less aggressive than the market’s positioning this time last week – if Fed speak is hawkish, inflation data hot and JOLTs data still indicative of massive demand for US labour, then risks tilted towards money markets bringing this pricing forwards rather than pushing it back. Given that, over the weekend, influential ECB member and Chief Economist Philip Lane remained resolute in his judgment that the current spike in inflation being seen in the Eurozone is transitory and that other core-ECB members speaking this week (like ECB President Christine Lagarde) are also likely to sound dovish, there is a risk that Fed rate hike pricing gets pulled forward more aggressively than ECB pricing, which points to downside risks for EUR/USD.