EUR/USD, FTSE 100 Forecast: Two trades to watch

EUR/USD looks to US inflation data

US CPI is forecast to rise to 3.2% YoY from 3.1%
March rate cut bets at 68%
EUR/USD edges towards 1.10 guided by 20 SMA

EUR/USD is grinding higher for a second day, inching towards 1.10 in quiet trade ahead of US CPI data.

US inflation is expected to rise to 0.2% MoM, pushing the annual rate to 3.2% YoY in December, up from 3.1% in November. Meanwhile, core inflation, which removes more volatile items such as food and fuel, is expected to tick lower to 3.8%, down from 4%

While this is a significant improvement from the double-digit inflation seen mid-2023, it is still above the Federal Reserve’s 2% target, which could mean that it is still too high in the eyes of policymakers.

While we know that the next move by the Fed is likely to be a rate cut, the timing and the depth of rate cuts across 2024 are still uncertain. Something that the market is acknowledging in 2024 as it reins back aggressive rate-cut bats.

A hotter-than-expected CPI report could help the market to continue unwinding, dovish rate cut bets lifting the US dollar, pulling EUR/USD lower.

Meanwhile, cooler-than-forecast CPI print, particularly surrounding the core CPI, could revive aggressive rate-cut bets in 2024.

Heading into the report, the market is pricing in a 68% probability of a rate cut in May and is pricing in around 130 basis points of cuts across the year.

EUR/USD forecast – technical analysis

EUR/USD is inching towards 1.10, finding support from the 20 SMA. A cool CPI print could help the pair rise above 1.10, the psychological level, towards 1.1020, the November high, and on to 1.11. A rise above 1.1145 creates a higher high.

On the downside, support is seen at 1.0890-80, the January low. A break below this level creates a lower low and exposes the 200 SMA at 1.0845.

FTSE 100 rises ahead of US CPI & with supermarkets in focus

Tesco rises after upbeat festive trading
Marks & Spencer falls on an uncertain consumer outlook
FTSE 100 tests 20 SMA support

The FTSE 100 and its European peers are heading higher with US inflation figures in focus. The data has the potential to either add to or dial back Fed rate cut expectations for March.

Investors are also digesting a slew of earnings, including numbers from Tesco and Marks and Spencer across the key Christmas.

Tesco lifted its profit guidance for the full year after an impressive set of Q3 results, which saw sales growth ramping up sharply during the key Christmas period. Tesco's strategy to keep prices low has gone down well with customers amid the cost of living crisis, preventing shoppers from switching to discount rivals ALDI and Lidl.

Meanwhile, Marks and Spencer also reported robust demand for the festive season, particularly in its food business. M&S posted an 8.1% rise in sales over the 13 weeks to December 30th, with food sales and womenswear as standout performers.

However, MKS warned over an uncertain outlook for the year as consumers continue to be squeezed by high interest rates, sending the share price 4% lower.

The figures come ahead of tomorrow's GDP data which is expected to show that the UK economy contracted again in the three months to November after shrinking 0.1% in Q3.

It's also worth watching for Chinese Inflation and trade balance data, which comes out overnight and could impact the miners on the open tomorrow. Weak exports and further deflation could weigh on metal prices and heavyweight mining stocks.

FTSE 100 forecast – technical analysis

FTSE ran into resistance at 7770 and has been falling lower. The price has fallen below 7700 and is testing support at the 20 SMA.

Sellers will look for a break below 7740, the weekly low, to extend losses to 7575, the 200 SMA.

Buyers need to rise above 7725 to take back control and bring 7770 back into target.

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