The controversial release on the growth of US inflation failed to support the dollar bulls. IThe greenback returned to the area of the 19th figure, as part of a corrective growth after a multi-day decline. However, buyers of EUR/USD also feel uncertain – as soon as the price broke the 1.1900 mark, the upward momentum faded. The euro cannot oppose itself to the US currency, so it passively follows the dynamics of the dollar index. Traders do not risk investing in the single currency ahead of the European Central Bank. Therefore, after jumping to the 1.1925 level, another downward pullback followed - first to the bottom of the 19th price level, and then to the area of the 18th figure. Just a few hours after the release, the price returned to its previous positions.
At the moment, there is a stalemate: both sellers and buyers of EUR/USD need an information impulse that would help push the pair out of the flat range. Today's release, to the disappointment of dollar bulls, did not act as a powerful information guide – the vague contradictory inflation picture left more questions than answers.
Let's turn to the dry numbers. The overall consumer price index came out at the level of forecasts. On a monthly basis, the indicator has been growing for the second month in a row, reaching 0.4% in February (the best result since July last year). In annual terms, the overall index also met analysts' expectations, rising to 1.4% (the strongest growth rate since February 2020). In general, this is a very decent, but at the same time widely expected result. And if the underlying CPI had shown similar dynamics, the market reaction could have been completely different. But, as they say, "the foreign exchange market does not tolerate the subjunctive mood." The core consumer price index, excluding food and energy prices, came out in the red zone, falling short of the rather weak forecast levels. So, on a monthly basis, the indicator grew by only 0.1% (with a growth forecast of 0.2%), on an annual basis-slowed down to 1.3% (negative dynamics is observed here for the second straight month). In other words, the unimpressive core inflation figures offset the gains in the overall inflation indicator.
In response to this release, the US dollar index sank from 90,120 to a daily low of 91.80. The euro-dollar pair, respectively, updated the daily high, rising to 1.1925. However, as mentioned above, the upward momentum almost immediately faded – as soon as the price crossed the 1.1900 mark, sellers became more active for the pair, which did not allow the development of a corrective growth.
Apparently, EUR/USD traders will trade in a narrow price range until the announcement of the results of the March meeting of the European Central Bank (or rather, until the end of the press conference of ECB President Christine Lagarde). The majority of analysts surveyed by Bloomberg and Reuters are confident that the ECB will maintain a dovish tone and voice more pessimistic assessments about the prospects for the recovery of the European economy.
First, the rate of vaccination in the EU countries leaves much to be desired, while the incidence of coronavirus remains at a high level. The vaccination campaign was launched two months ago, but to date, just over 2% of the European population has received the completed series of vaccinations. So, according to the Bloomberg agency, if in the United States there are 25 administered doses of the vaccine per 100 people, then in the European Union – only 8. All this suggests that the EU countries will have to either extend lockdowns or tighten existing quarantine restrictions with all the consequences that follow. According to analysts of the Bloomberg agency, a delay in the resumption of business operations for just one or two months can cost the EU economy from 80 to 100 billion euros. In other words, the weak pace of vaccination threatens the recovery of the euro zone economy – and it seems that tomorrow the ECB members will state this fact.
In addition, ECB members are likely to react to the current situation in the debt market, trying to reduce the growing yield of European bonds. As we remember, the head of the Federal Reserve reacted quite calmly to the increase in the yield of treasuries, saying only that this fact "attracted his attention" (And so he fueled the dollar's rise).
Unlike the representatives of the Fed, the members of the ECB are concerned about the growth of European bond yields. In particular, some of the officials said that the ECB is ready to use the flexibility of its emergency bond purchase program to prevent " unjustified growth in yields." It is likely that tomorrow the ECB will indicate its intentions in this context in a more practical plane. This uncorrelation in the approaches will increase the appeal of the greenback.
Thus, the results of tomorrow's meeting are likely to be not in favor of the euro. Another question is that the ECB's dovish mood is already partly taken into account in current prices. Therefore, it is difficult to predict the market reaction here: for example, the actual inaction of the central bank may negatively affect the mood of investors, especially against the background of the prolongation of lockouts – in this case, the euro will sink throughout the market. And vice versa: the euro may strengthen its position in connection with the announced prospects of increasing the amount of money that will be poured into the economy.
Given such an uncertain situation, it is better not to rush to trade decisions on the EUR/USD pair. Actually, the current flat is due to the indecision of both bulls and bears. If the ECB results are de facto in favor of the euro, the pair will show a strong corrective momentum, which will be limited by the resistance level of 1.2000 (the Tenkan-sen line on the daily chart). Otherwise, the EUR/USD bears will get another reason for the development of the downward trend and the price to fall to the bottom of the 18th figure.
