The economic calendar for the coming week is not rich in important events for the EUR/USD pair. Only a few macroeconomic reports are of interest, yet they can exert the strongest influence on the U.S. currency and, accordingly, on the euro/dollar pair. We are talking about the CPI and PPI releases, which will be published in the U.S. on Tuesday and Wednesday, respectively. These releases can either strengthen or weaken the greenback, allowing EUR/USD buyers to organize a corrective pullback. In addition, geopolitics remains in traders' focus amid Trump's latest statements on Greenland and the ongoing street protests in Iran.

Inflation

But let's start with inflation. According to preliminary forecasts, the headline consumer price index on a monthly basis will come in at 0.3%, down from 0.2%. In year-on-year terms, the headline CPI in December is expected to stay at November's level, i.e., at 2.7%. The core index, excluding food and energy prices, is expected to accelerate slightly both year-on-year and month-on-month, to 0.3% m/m (from the previous 0.2%) and to 2.7% y/y (from the previous 2.6%).

It should be recalled that last month, EUR/USD traders effectively ignored the CPI report, even though it reflected a slowdown in key indicators. The point is that market participants doubted the "truthfulness" of the published data. According to many analysts, the report reflected a technically understated inflation figure "that does not fully represent a correct decline in inflation." Due to the prolonged shutdown, BLS (the U.S. Bureau of Labor Statistics) specialists began collecting November data later than usual, i.e., already on the eve of the holiday season (Thanksgiving, Black Friday). This is a season of holiday sales when retailers offer discounts and promotions to reduce prices. Therefore, traders reacted skeptically to the "red tint" of the November report — it is assumed that the real inflation dynamic may be higher.

The December CPI will be the first relatively "clean" report after the shutdown and will therefore be perceived by markets as a more representative signal of the current inflation trend. Although the December report will also contain some structural lags — primarily in the housing component and December seasonal adjustments (New Year and Christmas discounts, goods volatility, etc.). The market will probably receive a fully "cleaned" picture of inflation only in the January–February reports. But, I repeat — traders are unlikely to ignore the December release in the same way as November's.

PPI

On Wednesday, another inflation indicator will be published — the Producer Price Index. Due to the prolonged shutdown, we will only learn the November value of this indicator next week. Forecasts call for both headline and core PPI to show upward dynamics. The headline producer price index should accelerate to 2.9% y/y, while the core should accelerate to 3.0% y/y.

Market reaction scenarios

If CPI and PPI come in at least at the forecast level (not to mention the green zone), the dollar will strengthen across the market, at the expense of weakening "dovish" expectations about further Fed action. According to the CME FedWatch tool, the market is almost 100% certain that the Federal Reserve will keep the rate unchanged after the January meeting (the probability of this scenario is 95%). At the same time, the probability of a rate cut in March is almost 30%, in April, 40%. If inflation in the U.S. accelerates, the market will come to the obvious conclusion that (at least) until summer, the Fed will maintain a wait-and-see stance. But if CPI and PPI again print in the red zone, the dollar will come under pressure, since the probability of a rate cut at the March meeting will again approach the 50% mark.

Geopolitics caveat

However, there is one important "but" here. Inflation reports will be able to influence EUR/USD dynamics only if the role of geopolitical factors diminishes. This is highly unlikely, given recent events in Iran and Donald Trump's bellicose statements.

Iran

I remind you that mass protests have continued in Iran since the end of last year, which began due to the collapse of the national currency and high inflation. Protest sentiments are being supported by the United States: Trump stated that the U.S. is "ready to help Iran in the fight for freedom." Previously, he threatened Tehran with military intervention if Iranian security forces used weapons against protesters. Judging by the reports coming in, protests in Iran are not subsiding, which means the denouement is still ahead.

Greenland and other threats

As for Greenland, alarming signals are also coming in. According to the British publication The Mail on Sunday, the U.S. president "ordered Special Operations Command to prepare a plan to invade the island." Meanwhile, one of Trump's closest aides — Stephen Miller — last week not only refused to rule out the use of military force to take Greenland under control, but also questioned the legal status of the island. Europe, for its part, is reportedly considering deploying troops to Greenland under the guise of a NATO mission, according to sources of the influential British newspaper The Telegraph.

One should not forget Trump's threats and bellicose statements toward Colombia, Cuba, and Mexico.

In other words, geopolitical turbulence continues to intensify, reflected in risk-off sentiment in markets. The dollar, in turn, enjoys increased demand as a safe-haven asset. Most likely, geopolitics will remain at the center of traders' attention for EUR/USD, which means pressure on the pair will persist. Macroeconomic reports will play a secondary role, even if they turn out unfavorably for the greenback.

Technical picture

From a technical point of view, on the four-hour chart, EUR/USD is located between the middle and lower lines of the Bollinger Bands indicator and below all lines of the Ichimoku indicator, indicating a bearish "Parade of Lines" signal. All these points point to a priority for short positions. The nearest target of the downward move is the 1.1620 level (lower Bollinger Band on H4). The main target is 1.1580 (lower boundary of the Kumo cloud on D1).