EUR/USD stabilizes close to a multi-month high below 1.0900, with additional hints for US inflation awaited

The EUR/USD pulls back from a nine-month high as bulls take a breather after achieving a five-day winning streak on Friday amid a light economic calendar. In spite of dovish expectations from the US Federal Reserve (Fed) and bolstered by yesterday's US inflation statistics, the major currency pair does not welcome bearish. As of press time, the major currency pair oscillates between 1.0850 and 1.055.

Despite the fact that multiple US Fed policymakers supported a 0.25 basis point (bps) rate hike after Thursday's disappointing US Consumer Price Index (CPI) data for December, none of them signaled the policy pivot, which raised doubts about the US Dollar's decline after the CPI matched expectations. As a result, EUR/USD bulls await additional evidence to support their views of a Fed policy shift in 2023. The same is true for today's China trade data for December, the initial readings of the US Michigan Consumer Sentiment Index (CSI) for January, and the US Consumer Inflation Expectations for the next five years.

In addition to the pre-data apprehension, the EUR/USD exchange rate is also affected by news articles predicting more US-China conflicts. According to anonymous sources cited by Reuters, the White House will discuss the recent ban on exports of chip-making gear to China during planned trips with Japanese and Dutch officials. The story also mentions that the White House Officials will not result in "immediate" commitments from China and Russia to implement comparable restrictions.

In the midst of these plays, the S&P 500 Futures remain undecided despite the fact that Wall Street finished with gains and US 10-year Treasury yields are licking their wounds near 3.46% at press time, following a drop to the monthly low of 3.46% the day before.

However, the US CPI met predictions of 6.5% YoY for December, compared to 7.1% previously. Moreover, CPI excluding food and energy confirmed the market consensus of 5.7% YoY, compared to previous readings of 6.0%. Notable is the fact that the CPI MoM marked its first negative result since June 2020 with a -0.1% figure for the specified month, compared to the 0.0% anticipated and 0.1% prior figure.

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, was the first to signal easy rate hikes after the US CPI, which weighed on the US Dollar. Thomas Barkin, president of the Federal Reserve Bank of Richmond, stated in the same vein that it "makes sense" for the Fed to steer more cautiously in its efforts to reduce inflation. However, the president of the Federal Reserve Bank of St. Louis, James Bullard, stated that the most likely scenario is for inflation to remain above 2%, therefore the policy rate will need to be elevated for a longer period of time.

Recently, the president of the Federal Reserve branch in Atlanta, Raphael Bostic, stated that he would be comfortable with a move of 25 basis points if consultations with industry leaders indicate that inflation is slowing. Previously, Fed's Bostic remarked that it is accurate to argue that the Fed is willing to overshoot.

Moving forward, expected growth in China trade data for December might aid EUR/USD buyers, while expected improvement in US consumer confidence data could limit the pair's rise. Notably, the US 5-year Consumer Inflation Expectations, the Eurozone Industrial Production for November, and the final printing of the bloc's inflation statistics will also be key to monitor for direction.