US CPI inflation set to rebound in December, core to remain high

• The US Consumer Price Index is set to rise 2.9% YoY in December.
• The core CPI inflation is seen steady at 3.3% last month.
• The Fed is widely anticipated to keep interest rates unchanged in January.

The US Consumer Price Index (CPI) report for December, a critical gauge of inflation, is set to be released on Wednesday at 13:30 GMT, courtesy of the Bureau of Labor Statistics (BLS).

The release of the CPI figures could boost the US Dollar's (USD) upward momentum, though it's unlikely to prompt any immediate changes in the Federal Reserve's (Fed) monetary policy plans, at least in the very near term.

What to expect in the next CPI data report?

Inflation in the US, as measured by the Consumer Price Index (CPI), is expected to rise by 2.9% annually in November, up slightly from 2.7% in November. Core CPI inflation, which strips out the more volatile food and energy categories, is projected to hold steady at 3.3% from a year earlier.

On a monthly basis, forecasts suggest a 0.3% increase for the headline CPI and a 0.2% rise for core CPI.

Previewing the report, analysts at TD Securities noted: "We look for core inflation to step down a touch after four reports where it printed firmer 0.3% m/m expansions. We expect goods deflation to act as a key drag, helping to offset a likely rebound in housing inflation. On a y/y basis, headline CPI inflation is expected to inch higher to 2.9% while core inflation likely closed the year unchanged at 3.3% y/y."

According to the release of the FOMC Minutes of the December 17-18 meeting, Fed officials voiced worries about growing risks of inflation trending higher and highlighted how potential shifts in trade and immigration policies could complicate efforts to bring it under control. The Minutes made several references to the potential economic and inflationary impact of these policy changes, underscoring their importance in shaping the US economic outlook.

How could the US Consumer Price Index report affect EUR/USD?

The incoming Trump administration is expected to take a stricter stance on immigration, adopt a more relaxed fiscal policy, and reintroduce tariffs on imports from China and Europe. These factors, combined with a resilient labour market, are likely to put upward pressure on inflation and have already started to reshape investor expectations. Markets now anticipate that the Federal Reserve will cut interest rates by just 25 basis points this year, keeping the outlook for the US Dollar stable for now.

However, with the US labour market cooling at a slow pace and inflation remaining stubbornly high, the December inflation report is unlikely to prompt any major shifts in the Fed's monetary policy. Currently, CME Group's FedWatch Tool indicates a 97% probability that the Fed will leave rates unchanged at its January 29 meeting.

Turning to the EUR/USD, Pablo Piovano, Senior Analyst at FXStreet, shares his technical outlook. He identifies the 2025 low of 1.0176 (January 13) as the first key support level, followed by the psychological parity mark of 1.0000. If parity breaks, the pair could test the November 2022 low of 0.9730 (November 3).

On the upside, resistance lies at the 2025 high of 1.0436 (January 6), seconded by the provisional 55-day Simple Moving Average (SMA) at 1.0516, and the December peak of 1.0629 (December 6). Pablo also notes that the daily Relative Strength Index (RSI) has bounced off the oversold territory. However, he cautions that any recovery is likely to be modest and short-lived.