EUR/USD recovery may extend with global market rally Nine-month highs near 1.08 may be possible short-termFed policy, U.S. CPI & China key influences for outlookEuropean calendar falls quiet after inflation falls in Dec

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The Euro to Dollar exchange rate entered the new week supported by a rising global market tide that could see nine-month highs around 1.08 traded over the coming days but Thursday's U.S. inflation figures are a potential banana skin for the single currency.

Europe's single currency has remained near some of its strongest levels against the Dollar since June in recent trade but may reach nine-month highs or more this week if U.S. economic data or developments in China lead global markets to build further on Friday's rally.

Risky assets like stocks rallied and appetite for currencies like the Euro improved on Friday after a volley of data appeared to suggest that Federal Reserve interest rate policy is beginning to have the desired effects of softening the labour market and dampening demand across the economy.

Financial markets revised down assumptions about how high Federal Reserve (Fed) interest rates are likely to rise following Friday's data, dealing a blow to the Dollar and lifting the Euro, although it's developments in China that are likely to be front and centre for the single currency on Monday.

"Our analysis suggests that while the available returns have fallen relative to a month ago, there is still room for China-sensitive assets to move further so long as the path to reopening remains clear," writes Dominic Wilson, a senior markets advisor at Goldman Sachs, in a Monday research briefing.

Above: Euro to Dollar rate shown at hourly intervals alongside AUD/USD and upside down Dollar-Renminbi rate.

Beijing's formal removal of many restrictions on international travel came into effect on Monday in a further abandonment of coronavirus-related restrictions that have suppressed the world's second-largest economy over the last year while also hampering recoveries of trade partner economies.

"Chinese data hasn’t provided any new information about recovery, but the speed with which the authorities are re-opening the economy, and their willingness to tolerate high Covid-19 infection rates, has caught many by surprise and is affecting sentiment," writes Kit Juckes, chief FX strategist at Societe Generale, in a Friday market commentary.

"US CPI data on January 12 will draw the most attention, with the market looking for both core and headline inflation rates to fall, the latter by more as energy prices reverse course. French manufacturing output may be the main Eurozone data point," Juckes adds.

China is one of the Euro area's three largest export markets so the reopening is potentially a favourable development for the single currency, although incoming remarks from Fed officials and Thursday's U.S. inflation data are both potential risks for the Euro-Dollar rate.

This is partly because Fed officials have sought to discourage recent declines in U.S. bond yields and the Dollar but also because economists and financial markets are banking on a third month of declines for U.S. inflation being announced on Thursday.

Above: Euro to Dollar rate shown at daily intervals alongside AUD/USD and upside down Dollar-Renminbi rate. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.

"With the labour market remaining tight, the Fed is on track to continue hiking into early 2023 despite inflation beginning to move in the right direction, a trend that should continue in the December CPI report," says Nicholas Van Ness, an economist at Credit Agricole CIB.

Economists are looking on average for U.S. inflation to have fallen from 7.1% to 6.6% in December but investors have already reduced expectations for U.S. interest rates in recent weeks so the Pound and Dollar may be more exposed to any upside inflation surprise than anything else.

However, before then attention will be on Fed Chairman Jerome Powell Tuesday when he participates in a panel discussion at the Riksbank’s International Symposium on Central Bank Independence, as well as appearances from other Fed policymakers.

"Other Fed speakers scheduled this week are Bostic, Daly, Harker and Bullard," says Tom Kenny, an economist at ANZ.

"Recent speeches from Powell suggest that the Fed is focused on services ex-rent inflation in its quest to achieve its price stability objective. Thus, any downward surprise to core inflation, brought about by say weaker goods prices, is unlikely to provide the Fed with any comfort," he adds.

Above: Euro to Dollar rate shown at weekly intervals with selected moving-averages and Fibonacci retracements of January 2021, June 2021 and February 2022 declines indicating possible areas of technical resistance. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.