Investors eye inflation data ahead of central banks meeting

As traders started the week on a cautious note ahead of the last Federal Reserve policy-setting meeting of the year and the reading of consumer inflation in the US, the greenback firmed in early European trade Monday.

The world’s top central banks will conclude the year 2022 with hefty rate hikes as their battle against inflation continues. The Federal Reserve is expected to hike interest rates by a half point at its meeting on Wednesday, which has already been baked into expectations; therefore, investors will be more focused on indications of how high rates may rise in the future. Data on US inflation due out on Tuesday will provide fresh clues about what the Fed's plans will be for the coming months. As we move into the end of the year, we are likely to be hit with the double whammy of inflation data and the Fed meeting, both of which will likely set the tone for US stocks. At the same time, the Bank of England and the European Central Bank are expected to raise interest rates by half a point at their meetings on Thursday as well.

Persistent inflation

Even though US Treasury Secretary Janet Yellen predicted on Sunday a substantial reduction in inflation by 2023, data released on Friday showed that US producer prices climbed more than expected last month, suggesting persistent inflationary pressures and a possibility that the Federal Reserve will continue to increase interest rates for a longer period.

November's US consumer inflation figures are expected to show the headline annual figure falling to 7.3%, while core annual inflation is seen dropping to 6.1%.

After two straight 75 basis point increases, the EUR/USD traded largely flat at 1.0530, while the European Central Bank is also expected to announce a 50 basis point hike later this week, which is viewed as a slowdown in the pace of tightening.

A slowdown in headline inflation in the Eurozone in November raised hopes that the sky-high price growth in recent months had been put to rest.

It should be noted, however, that this level was at 10%, five times the ECB's inflation target. Therefore, policymakers are likely to want to sound hawkish, even as the region appears to be headed for a recession in the next couple of months.

EUR/USD

The EUR/USD will still likely struggle to trade sustainably at over 1.0600. However, it is more likely to face downside risks by the end of the year due to global risk uncertainty and rebounding energy prices, which would contribute to the dollar regaining some ground.

As EUR/USD regains ground above 1.0500, traders are eyeing a sustained move above 1.0550 in the European session on Monday as they attempt to maintain this position. An uptick in the currency pair could be related to a minor pullback in the US Dollar across the curve as US Treasury bond yields extend to the downside. Following the surge in cases of COVID in China, markets are uneasy. Fears persist that the virus could disrupt consumption and manufacturing in the second-largest economy.

GBP/USD

There has been an indecisive start to the new week for the GBP/USD pair with market participants refraining from making large bets ahead of the high-tier data releases and the all-important central bank decisions scheduled for this week. It would be surprising to see a significant move in either direction within the remainder of the day given the short-term technical outlook, which suggests a loss of bullish momentum for the pair.

On Monday, there will not be any high-impact reports in the American session. There could be some impact on the dollar's valuation in the US session as a result of the auction of 10-year US Treasury notes, but the pair is likely to remain in consolidation at least until tomorrow's UK jobs data and US inflation report are released.