A volatile session in store for EURUSD

EZ CPI & US FOMC 

Wednesday looks set to be a big day for the markets, with high impacting releases from both the Eurozone and the Federal Reserve. 

Later this morning the market will be updated on the state of inflation in the eurozone. The expectation is for CPI to dip slightly in January to 1.3%, down from 1.4%. Meanwhile core inflation is expected to finally move higher to 1% after spending several months down at 0.9%. 

EZ core inflation to boost EUR/USD? 

Inflation continues to be a sticky point for the European Central Bank (ECB) as CPI is still some way off the central bank’s 2% target. However, should core inflation push northwards, combined with news of the strengthening eurozone economy, growing at the fastest pace in 15 years, the ECB are likely to feel more confident in their inflation outlook. The EUR/USD has continued its rally moving into the release, trading at $1.2445. A strong reading could see the bulls push the pair closer to the near term psychological target of $1.25. 

A more hawkish FOMC? 

Inflation will remain a key theme as investors switch their attention to the FOMC decision at 7pm GMT. The market is not expecting any changes to policy, in Janet Yellen’s final meeting before she hands power to Jerome Powell. However, expectations are growing of a slightly more hawkish sounding Fed. Concerns over persistently low inflation across the later half of 2017, which have plagued Fed officials, could be starting to ease. A weaker dollar, strong jobs growth and higher business investment are all supporting the case of higher inflation, and the rallying yields on 10 year treasuries could also go some way to easing the Fed’s concerns. A more upbeat economic outlook is almost a given, however whether the Fed will tweak the inflation outlook expectations remains to be seen. That said, we don’t expect the Fed to deviate from the base case of 3, 25 basis point hikes through 2018, with the first expected in March. 

Ahead of the announcement the dollar is struggling to keep its head above water. The dollar is currently down almost 0.3% on the day, pushing below 89.00. The weaker dollar comes despite expectations of a more hawkish Fed, high US treasury yields and improved inflation outlook. Therefore, any disappointment from the Fed could impact heavily on the dollar potentially dragging the greenback below its recent three year low of 88.44, reached last week. 

Bitcoin tests 10k 

Bitcoin is once again on a downwards trajectory. The digital currency will be glad to see the back of January, a month where it experienced its biggest monthly percentage decline since December 2013. The heavy sell off comes as Bitcoin has been unable to shake off concerns of increased regulation following a historic hack in Japan, which saw bitcoin worth $530 million stolen and resulted in promises by the Japanese financial regulator to inspect all crypto currency exchanges. This comes hot on the heels of clamping down on crypto currencies in China and South Korea, which spooked the markets earlier in the month.