EUR/USD - Rallies after a very encouraging US inflation report

• US headline and core CPI miss expectations
• Market odds of another Fed rate hike fall to near zero
• EURUSD breaks through channel high after report

We've seen quite a response to the US inflation report on Tuesday, with investors clearly buoyed by the miss on both the headline and core numbers.

While in both cases we're talking about modest misses, it does feel nonetheless significant. The annual core rate fell to 4% which is still far too high but the monthly reading fell back to 0.2%, preventing an anticipated third month of 0.3% and the possible development of a stubborn trend, which is still broadly on the way down.

It may sound marginal but paired with a miss on the headline to 3.2 on an annual basis and flat on a monthly and this looks like a really promising report.

Of course, there's another to come a day before the December meeting but today potentially lays the groundwork for the Fed to adopt a much less hawkish position - especially compared with September - and markets are now seemingly convinced the tightening cycle is over.

A bullish breakout after the CPI report

EURUSD has finally broken out following more than a month of consolidation and it's come counter to the trend that preceded it.

EURUSD Daily

Source - OANDA on Trading View

That was looking increasingly possible over the last couple of weeks as the longer we go without a move in the direction of the prevailing trend, the weaker it looks.

What's more, we saw a strong push at the upper end of the rising channel last week, and rather than turn significantly lower - perhaps toward the bottom of the channel - it slightly pared gains in what looked more like a near-term bullish consolidation pattern.

Perhaps that suggested traders were positioning for some bullish data today (weaker inflation being negative for the dollar) and it certainly delivered, triggering a strong breakout higher.

The question now is whether this has the potential to gather momentum or if the Fib levels could put up significant resistance. The 50% Fibonacci retracement level already appears to be putting up some, with the rally having stalled around here.