Danske Bank: Maintaining a Sell-on-Rallies Strategy for EUR/USD Post-US CPI Data

Synopsis:

Danske Bank assesses the impact of the recent US CPI data on EUR/USD, maintaining a cautious approach and continuing their sell-on-rallies strategy.

Key Insights:

1. USD’s Reaction to US CPI Data:

   • Following the release of the US CPI data, the USD initially strengthened in the G10 space but later reversed most of its gains. The market reaction subdued, indicating that the CPI data did not significantly alter market perceptions.

2. Details of the CPI Report:

   • The headline CPI for December showed a 0.3% month-on-month increase, slightly above consensus. The core CPI also rose by 0.3%, in line with expectations. The shelter component contributed significantly to the upside surprise. However, the overall details suggest a continuation of the longer-term inflation slowdown.

3. Fed’s Focus on PCE over CPI:

   • The Federal Reserve primarily focuses on the Personal Consumption Expenditures (PCE) index rather than CPI. Given that housing has a smaller weight in PCE compared to CPI, the core PCE figure (due on January 26) is likely to show a lower rate than the core CPI.

4. Implications for the Fed’s January Meeting:

   • The CPI report aligns with the trend of declining inflation, suggesting it will not heavily influence the Fed’s decision at the upcoming meeting on January 31.

5. Strategic Outlook for EUR/USD:

   • Danske Bank remains strategically bearish on the USD over the year. In the near term, they favor selling EUR/USD on rallies, looking for strategic opportunities to sell the currency pair.

Conclusion:

Danske Bank interprets the recent US CPI data as consistent with a broader trend of declining inflation, unlikely to significantly impact the Federal Reserve’s policy decisions. Therefore, they continue to advocate for a sell-on-rallies approach to EUR/USD, identifying it as a strategic opportunity in the current market environment.