EUR/USD Reversal as Eurozone Inflation Falls Short, Attention Shifts to Crucial US NFP

The EUR/USD pair continued its downward trajectory, hovering near 1.0900 on Friday. Despite the annual inflation in the Euro area escalating to 2.9% in December, it fell short of the market's 3% expectation, somewhat easing pressure on the ECB to act. Attention now turns to the eagerly awaited US December jobs report.Meanwhile, the GBP/USD exhibited a bullish surge, reaching 1.2730 during the European session on Thursday. However, its momentum reversed in the latter half of the day, leading to a close just below 1.2700. The pair maintained a relatively subdued state, fluctuating within a narrow range early on Friday. Investor caution prevailed ahead of the much-anticipated December Nonfarm Payrolls data from the US.Gold prices faced bearish pressure, sliding below $2,040 on Friday. Traders hesitated to take bold positions in anticipation of the US monthly jobs report. The 10-year US T-bond yield held firm above 4%, preventing XAU/USD from staging a recovery.Forecasts for the US labor market report predicted a creation of 170,000 jobs in December, a decline from the 199,000 jobs added in November. The Unemployment Rate was anticipated to inch up to 3.8%. Average Hourly Earnings, a crucial gauge of wage inflation, were expected to dip to 3.9% in the year through December.A pivotal aspect to monitor is the composition of employment gains, as three sectors – leisure and hospitality, private education and health services, and government – contributed to 81% of all jobs created in the year up to November 2023.Against a backdrop of diminishing inflation in the US, market sentiment leaned towards the belief that the Federal Reserve had concluded its tightening cycle. The probability of a March Fed rate cut stood at approximately 60%, as indicated by federal funds rate futures.The anticipation for a rate cut gained traction following the Fed's revised Summary of Economic Projections in December, revealing a forecasted 75 basis points reduction in the policy rate. Fed Chairman Jerome Powell acknowledged discussions about the appropriate time for a rate cut, emphasizing the importance of avoiding prolonged high interest rates.Despite dissenting opinions from Chicago Fed President Austan Goolsbee and Cleveland Fed President Loretta Mester, who suggested markets were premature in expecting rate cuts, the market held firm on its expectations for a March reduction.A positive NFP headline print within the range of 200K to 250K, coupled with elevated wage inflation, will likely prompt a hawkish repricing of Fed rate cut expectations. This scenario might bolster the ongoing US Dollar recovery and weigh on EUR/USD. Conversely, disappointing data affirming dovish Fed prospects will almost certainly renew selling pressure on the USD, considering that the brisk rally from the start of the year created some space for the currency to trim gains.