The EUR/USD Pair Retreats From 1.1040 As Markets Retreat

At 1.1040, the EUR/USD reached its highest level in eighteen weeks, before retreating toward 1.1000 as markets close down before the holiday break. Friday's US inflation reading fell short of expectations, maintaining investor anticipation that the Federal Reserve's (Fed) rate cuts will quicken in 2024.

The Core Annualized PCE Price Index for the year through November was reported at 3.2% on Friday, which was significantly lower than the anticipated 3.3% and even further behind the year-over-year reading of 3.4% in October (revised down marginally from 3.5%).

The anticipation of accelerated rate reductions by the Federal Reserve (Fed) through 2024 is increasing in the money markets due to inflation metrics that continue to decline at a quicker rate than the majority of models can forecast. At present, investor expectations have significantly surpassed the Federal Reserve's own forward-looking rate expectations. Money markets have priced in Fed rate cuts worth more than 160 basis points, with some placing bets that the rate cut cycle could commence as early as March 2024. In contrast, the Fed's dot plot of interest rate expectations only anticipates 75 basis points in reductions by the end of 2024.

The market's USD-short momentum was stifled by a miss in US Durable Goods Orders for November, which came in at 5.4% compared to October's -5.1% (revised up slightly from -5.4%). This indicates that the US economy might remain robust enough to permit the Federal Reserve to implement fewer rate cuts than initially anticipated.