The US Dollar fails to rally on the hot NFP: signal of weakness or caution ahead of CPI?

FUNDAMENTAL
OVERVIEW

USD:

The US Dollar spiked higher
yesterday following a strong US NFP report as the market pared back slightly
Fed rate cut bets but surprisingly gave back all the gains. Maybe the market is
still too convinced of more labour market weakness to come, or it decided to
wait for the US CPI. Whatever the reason, the data since the start of the year
has been clearly pointing to improving conditions that do not justify further
rate cuts.

The focus now turns to the
US CPI report coming up tomorrow. If we get hot data, I can’t see how the
market could brush that off like it did with the NFP. The hawkish repricing
will likely be more substantial and trigger a more sustained rally in the greenback.
On the other hand, soft data shouldn’t change much in terms of market pricing
but could keep the dollar under pressure.

EUR:

On the EUR side, nothing
has changed. As a reminder, the ECB held interest rates steady as widely
expected at the last meeting and kept the same data-dependent and
meeting-by-meeting guidance. The policymakers have eased the rhetoric on the
euro recently after the currency dropped below the 1.20 level against the
dollar. Even ECB’s de Guindos, who was the first to draw a line in the sand at
1.20, played down the surge in January as “not dramatic”.

The focus remains on inflation
as the central bank has repeatedly stated that it won’t respond to small or
short-term deviations from the 2% target. If we start to see softer data,
traders might start to price in some probabilities of a rate cut some time in
the second half of 2026.

EURUSD TECHNICAL
ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can
see that EURUSD is consolidating around the
1.19 handle as traders await the US CPI report. If the price falls back to the
1.1768 low, we can expect the buyers to step in with a defined risk below the
low to position for a rally into the 1.21 handle. The sellers, on the other
hand, will look for a break lower to extend the drop into the 1.16 handle next.

EURUSD TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we can
see the rangebound price action between the 1.1830 support and the 1.1910
resistance. Traders will likely continue to play the range until we get a
breakout on either side, which will likely be triggered by the US CPI report tomorrow.

EURUSD TECHNICAL ANALYSIS –
1 HOUR TIMEFRAME

On the 1 hour chart, there’s not much else we can add here as the
consolidation will likely persist until the US CPI unless we get a very big
deviation in today’s Jobless Claims data. The red line define the average daily range for today.

UPCOMING CATALYSTS

Today we get the US Jobless Claims figures, while tomorrow we conclude the
week with the Eurozone Q4 GDP and the US CPI report.