Forexlive European FX news wrap: Choppy price action as the US CPI looms

• US November NFIB small business optimism index 101.7 vs 94.2 expected
• USD/JPY looks to US CPI report to potentially break ping pong range
• China shot in the arm already fading away?
• German engineering body continues to see fall in production for 2025
• European indices hold slightly lower at the open today
• What are the main events for today?
• Eurostoxx futures -0.5% in early European trading
• Germany November final CPI +2.2% vs +2.2% y/y prelim
• China has full confidence in achieving this year’s economic target – Xi
• A light one on the data docket in Europe today
• RBA’s Bullock: I don’t know if we’re going to be cutting rates in February
• RBA’s Bullock: We did not explicitly consider an interest rate cut today
• RBA’s Bullock: The change in wording today is deliberate
• RBA’s Bullock: We need to think carefully about where we’re going on policy
• Aussie unwinds Monday gains as RBA softens policy stance

It’s been a pretty slow session as the lack of important data releases and limited newsflow kept the price action at bay. The only highlight was the US NFIB Small Business Optimism Index which jumped to the highest reading since June 2021 in another sign that the US economy is picking up steam.

The inflation risk and the Fed’s reaction function in 2025 will be the biggest focus of markets, especially in the current context of stretched valuations and heavy risk taking. The complacency and animal spirits resemble a lot the 2021 mania.

The focus this week is on the US CPI report tomorrow. It looks like the Fed really wants to cut next week before pausing
for some months. So, we might need a notable upside surprise in the core inflation
numbers to force them to change plans.

Even if the Fed decides to
cut next week despite a hot CPI though, the market will likely scale back further the
rate cuts expectations for 2025 and that could trigger some risk aversion with
the US Dollar rallying across the board and risk assets being sold.

The best case for the risk sentiment is a soft report tomorrow. That will likely see the US Dollar offered across the board given the overstretched positions.

This article was written by Giuseppe Dellamotta at www.forexlive.com.