14.01.202610:21 Forex Analysis & Reviews: U.S. Inflation Is Exactly What the Fed Needs Right Now

The dollar reacted with a slight decline against a number of risk assets on news that U.S. core inflation in December of last year rose less than expected, providing a more confident signal of slowing price growth after distortions related to the government shutdown complicated the previous report. Demand for the dollar, however, later returned.

According to data from the Bureau of Labor Statistics released on Tuesday, the core consumer price index, which excludes volatile food and energy components, rose by 0.2% compared with November. On a year-over-year basis, it increased by 2.6%, reaching a four-year low. Headline consumer inflation came in above forecasts, rising by 0.3%.

The data are arguably a more convincing sign that inflation is on a downward path, as a number of caveats in the November report had contributed to a significant decline at that time. However, many economists said the figures had been artificially understated due to the record-long government shutdown, as the Bureau of Labor Statistics was unable to collect price data in October and assumed no growth in key housing market indicators. In addition, November data were collected later than usual and may have been distorted by holiday discounts.

According to the U.S. Bureau of Labor Statistics, there was some increase in housing costs, which became the most significant contributor to the overall monthly rise in prices, while clothing prices also edged higher. The cost of recreation and airfares rose quite sharply, and prices for entertainment also increased. Food prices posted their largest increase since August 2022.

As for price declines, they were observed in household appliances, used cars, and trucks. The cost of vehicle repairs fell by the most on record. Prices for core goods, excluding food and energy, were unchanged last month, which also ran counter to expectations of a rebound.

"Although the impact of the government shutdown on the data has not yet fully faded, the key positive takeaway from this report is the stagnation in core goods prices, which supports the view that the effect of tariffs on consumers has been far less significant than expected," Fitch Ratings said.

Against this backdrop, Federal Reserve officials are expected to keep interest rates unchanged at the end of this month after three consecutive cuts through the end of 2025. Officials remain divided over how much further rates should be reduced this year, as they seek to balance concerns about inflation remaining above target with ongoing weakness in the labor market.

As for the current technical picture in EUR/USD, buyers now need to focus on taking the 1.1650 level. Only this will allow them to target a test of 1.1680. From there, it would be possible to move up to 1.1710, but doing so without support from major players will be quite difficult. The most distant target would be the 1.1740 high. In the event of a decline in the trading instrument, I expect any serious action from large buyers only around the 1.1630 level. If there is no activity there, it would be advisable to wait for a retest of the 1.1610 low or to open long positions from 1.1591.

As for the current technical picture in GBP/USD, pound buyers need to take the nearest resistance at 1.3450. Only this will allow them to target 1.3480, above which a breakout will be quite difficult. The furthest target would be the 1.3515 level. In the event of a decline in the pair, bears will try to seize control of 1.3420. If they succeed, a break of the range will deal a serious blow to bullish positions and push GBP/USD down to the 1.3390 low, with the prospect of a move toward 1.3370.