Markets remain mixed as CPI figures are set to cool down

As investors prepare for further inflation data this week, the European markets opened mixed, with the U.S. consumer price data for December due on Thursday. On Wednesday, the US dollar traded largely flat in Europe, as risk sentiment rose, but attention remained firmly focused on the release of key US inflation data.

A measure of the greenback's position against a basket of six other currencies, the Dollar Index, edged higher to 103.017, just above the seven-month low the dollar reached earlier this week.

After hitting a 20-year high in September, the dollar has been under pressure as investors have begun to factor in the end of the Federal Reserve's cycle of rate hikes as inflation has started to ease, and as a result, the dollar has started to lose its value in the market. In a speech Tuesday, US Federal Reserve Chairman Jerome Powell expressed his conviction that while the central bank works to fight persistently high inflation, it must be free from political interference. During a speech he gave to the Swedish central bank Riksbank, Powell stated that if we are going to stabilize prices, we will have to make tough decisions, which can be politically unpopular. There are no direct clues contained in the speech as to where policy will go for the Fed, which raised interest rates seven times in 2022 and has indicated that more increases are likely to occur this year in attempts to keep inflation low.

There is little chance that investors will place large positions ahead of Thursday's Consumer Price Index (CPI) data coming out of the US. Following strong gains on Tuesday, Wall Street's main indexes could stage a correction and assist the US Dollar in holding onto its gains.

US inflation is expected to edge lower

Due to the relatively empty economic calendar on Wednesday, the focus will be on Thursday's release of the US Consumer Price Index (CPI). There is a reasonable chance the report will reveal further reductions in inflation from the previous month, with a headline annual rate of 6.5% expected in December, a reduction from the previous figure of 7.1%. There is a view that the core CPI figure, which excludes volatile energy and food prices, will show an increase of 5.7% in December, which is significantly lower than the 6.0% increase in November.

The 10-year US Treasury note auction from the US will serve as a new springboard as the late American session draws to a close. In the event that the high yield comes in below 3.5%, then the 10-year U.S. Treasury bond yield could turn south at that time and put some strain on the U.S. Dollar at that time.

EUR/USD buyers seek 1.0750

Should the risk rally pick up steam, EUR/USD could continue to rise. An area of resistance seems to have developed at 1.0750. By rising above that level and using it as support, the pair is likely to target psychological levels of 1.0800 and 1.0840. In addition, it would be worth noting that the Relative Strength Index (RSI) indicator on the four-hour chart is about to cross above 70. Hence, there is a possibility that buyers may move to the sidelines in the short term, waiting for a downward correction before taking any action in the long run.

On the downside, the 1.0700 psychological level aligns as the first support before 1.0640, which is in line with the 50-period Simple Moving Average. A decisive penetration of that can lead the pair towards 1.0580, located at the 200-period SMA.