EUR/USD retreats from near 8-month highs in opening New YearInflation differential suggest fairly priced between 1.0449, 1.0745Looming EU CPI data could boost upside potential for EUR/USDBut Fed minutes, U.S. payrolls & wage data pose risk short-term

Above: Lady Justice statue, Frankfurt © Adobe Images

The Euro to Dollar exchange rate entered the New Year on the back foot but inflation differentials suggest that it would be fairly priced anywhere between 1.0449 and 1.0745 though economic data due out of Europe and the U.S. could test market appetite for the single currency during the week ahead.

Europe's single currency tumbled from near eight-month highs to open the new week below 1.06 following a holiday period in which a directionless Dollar and lower energy prices appeared to support the Euro against many counterparts.

However, using the latest inflation and interest rate differentials to deflate from a January 2022 starting level around 1.1371 suggests that EUR/USD is fairly priced anywhere between 1.0449 and 1.0745, although these numbers could rise when European inflation data for December is released on Friday.

"With flash German CPI (3 Jan), euro area PPI (5 Jan), flash euro area CPI (6 Jan), Sentix (9 Jan), the German ZEW (17 Jan) and PPI (20 Jan) and flash PMIs (24 Jan) there is much data to digest," says Jordan Rochester, a strategist at Nomura.

"The key issues are whether euro area CPI inflation slows quickly or if the good news from government fiscal packages, lower gas prices and/or China’s reopening hopes lead to a continued rebound in European growth data," Rochester writes in a late December research briefing.

Above: Euro to Dollar rate shown at daily intervals. Click image for closer inspection. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

The Euro to Dollar rate has risen sharply in recent months but still fell by more than five percent for the 2022 year overall after the conflict in Ukraine weighed heavily on European assets while a hawkish Federal Reserve (Fed) boosted market appetite for the U.S. Dollar.

"Of course, market prices for gas are still four times higher than they were before Russia started to curtail supplies in 2021. Nonetheless, the recent correction in wholesale prices for gas will support growth and reduce inflation," says Holger Schmieding, chief economist at Berenberg.

"They will also mitigate fiscal risks as governments need to pay fewer subsidies to keep energy costs for consumers at politically tolerable levels. Last week, we raised our calls for the change in real GDP in 2023 from -0.7% to -0.4% for heavily affected Germany and from -0.3% to -0.2% for the Eurozone as a whole. If sustained, gas prices below €100 per MWh would tilt the balance of risks to our forecasts for European growth further to the upside," he writes in a Monday research briefing.

However, it's the action-packed economic calendar that will matter most for the Euro-Dollar rate in the week ahead with the implications for interest rate differentials stemming from Friday's release of European inflation figures and U.S. employment data for December being most important.

"We forecast euro area December flash inflation to print at -0.4% m/m and 9.2% y/y," says Iaroslav Shelepko, an economist at Barclays

Consensus suggests Europe's inflation rate fell from 10.1% to 10% in December, making for a second consecutive decline from a 10.7% peak in October, although if Barclays' forecast for a deeper decline proves correct then it could have favourable implications for the Euro to Dollar rate.

However, much also likely depends on Wednesday's release of minutes from December's Fed meeting and what December's non-farm payrolls report implies about the strength of the U.S. labour market later on Friday, and the inflation-implications of the latest wage growth figures.

"The US economy is slowing (lower ISM), job openings and job growth are slowing, with the Fed closer to the end of its rate-hiking cycle. For January as was the case in November and December, the key data release will be on 12 January, when December’s CPI figures are released," Rochester says.

Above: Euro to Dollar rate shown at weekly intervals with selected moving averages and Fibonacci retracements of 2021 downtrend indicating possible areas of technical resistance for Euro. 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.