Much of the fall in EURUSD this week was due to the widening of the rate differential between short-term EU and US bonds. Following the CPI release on Wednesday, the yield gap rose 4 bps. and then added another 6 bp over the next two days. reaching 1.267% (maximum since the beginning of the pandemic):

The potential for further decline in the pair next week remains due to the prospects of the Fed to announce more aggressive measures compared with the relatively dovish position of the ECB. The dollar index feels quite comfortable above 95 points and is holding close to the opening point on Friday. EURUSD could be pressed down to 1.14 - 1.138, from where a corrective wave of purchases is expected, which looks very attractive, given that a rebound will occur from the lower border of the medium-term descending channel:

It should also be remembered that price pressures haven’t likely topped out in the US yet, because the shopping season is ahead, which is a powerful seasonal driver of price increases. This year, the full-fledged season of Christmas discounts in the US will likely be missed, as we discussed earlier, inventories in the US (especially of durable goods like cars) are at a relatively low level and making discounts, knocking down inflation, is not a particularly attractive idea for retailers right now.

The British economy data on Thursday was disappointing. Manufacturing and industrial output growth missed estimates, with the impact of Brexit being felt, creating additional disruption to supply chains, in addition to the global trend. GDP in September grew less than forecast, so the recent unexpected twist at the meeting of the Bank of England, which was that the Central Bank refused to raise the rate, looks quite justified. The market may start to price in the outcome in which the Bank of England will disappoint in December as well, announcing that it extends the pause in tightening till the next meeting. In this situation, there is a risk of further expansion of the yield differential between UK and US assets and, accordingly, an increase in pressure on GPBUSD.

As in the case of EURUSD, a bearish channel can be seen in the technical picture of the pair, and GBPUSD is also apparently preparing to test its lower border. At the same time, given the presence of a clear steep downtrend line, a short-term rally to 1.3460 is possible and then a sharp movement down to the lower border of the channel (1.3270):

The focus today is a report from U. Michigan on consumer sentiment, as well as a speech by Fed rep Williams. A rebound in the consumer sentiment index, and in particular the expectations index, after several months of rather weak readings will reinforce the argument that the US Christmas season may further accelerate inflation, so a moderately positive dollar reaction to the strong data can be expected. In turn, Williams' comments will be examined for concerns about entrenched inflation and the Fed's potential reaction to it.