The Week Ahead – Euro Steadies Over Inflation Bet

EURUSD awaits inflation-driven breakout

The euro inched higher as traders bet on lasting inflation in the eurozone. The single currency may become the main driver of volatility in 2022. Relatively speaking, pricing the US dollar involves a greater degree of certainty now that the US Fed has penciled in its rate hike agenda.

The euro, however, remains a wild card as the ECB is still stuck with the highly divisive debate on inflation. A hot CPI reading could be a step closer for policymakers to drop the all-familiar ‘transitory’ rhetoric.

In turn, this would boost demand for the euro in the process. The bulls are buying the dips around the floor at 1.1190. A break above 1.1550 may send the pair to 1.1740.

USDCAD advances over BOC’s patience

The Canadian dollar falls behind the US counterpart over policy divergence. The Bank of Canada tempered the market’s expectations with no rate hikes in sight until the second quarter of 2022.

Even though recent data indicate that Canada’s economy is back on track, policymakers seem to be in no rush to change their mind. Strong labor performance may help tilt the balance to a more hawkish tone, offering support to the currency in the process.

A solid bounce in oil also helps improve risk appetite in regards to the loonie in the short term. The pair is testing the fresh support at 1.2620. A close above 1.2960 could lead to 1.3200.

XAUUSD steadies ahead of FOMC minutes

Gold consolidates recent gains as the dollar index oscillates near a one-month low. Price action has steadied amid thin trading and a lack of commitment during the holiday season.

This is about to change with a slew of data catalysts this week. The Fed meeting minutes and nonfarm payrolls would shake off the festive lethargy and jumpstart the New Year.

With renewed attention on the greenback’s fundamentals, any headlines supportive of the US dollar could be detrimental to bullion’s recovery. 1760 and 1870 remained a tight range and a breakout on either side would seal the next directional move.

US 100 bounces from discounted valuations

The Nasdaq 100 falls back as investors favor value stocks. The tech index rebound has been trailing the S&P 500’s after heavy institutional selling in recent months, underlining the relative struggle of growth investing lately.

Inflation may remain a focal point this year and expectations of higher interest rates could be strong headwinds for valuations. However, as hot money weighs alpha against higher opportunity cost, popular stocks that are showing heavy discounts might attract a buying-the-dips crowd.

A close above the peak at 16750 may resume the rally. 15600 remains a key support.