The EUR/USD pair slowly tried to make an upward correction today. The price, which is clearly under pressure, shows low volatility. In general, the fundamental background is in favor of the US currency, so the scenario of the pair's further decline looks like a priority. The bears of the main currency pair are on the side of the record inflation growth in the US, the growth of anti-risk sentiment, the strengthening of hawkish expectations regarding the Fed's actions, and the simultaneous strengthening of the dovish mood regarding the further steps of the ECB. Buyers of the pair can only count on a temporary weakening of the US dollar since the euro has almost no arguments to strengthen alone. Traders' predictions after the results of the February meeting of the ECB collapsed last Thursday when Christine Lagarde opposed the tightening of monetary policy. Therefore, the EUR/USD bulls failed to do things on their own and are forced to follow the US currency.
The US dollar will likely strengthen its position this week, especially if the situation around Ukraine continues to escalate. To date, the situation is developing exactly according to this scenario. The American television channel, CBS, reported that the United States plans to withdraw all the remaining diplomats from Kyiv within 24-48 hours. This example will be followed by Japan. The situation is far from de-escalating, so it is highly likely that the greenback will be in high demand on the market as a defensive asset.
However, the macroeconomic calendar for the EUR/USD pair is also full of events. For example, an unscheduled closed meeting of the Fed will take place today at approximately 16:30 Universal time, the results of which may strengthen the position of USD bulls. It can be recalled here that record inflation growth in the US was published last week: the main components surged to 40-year highs, exceeding forecast levels. The next day, Fed spokesman James Bullard (one of the brightest representatives of the Fed's "hawkish wing") made a speech. According to him, he decided to take "the most hawkish position" in the light of recent releases. He expressed confidence that the regulator should raise the interest rate by one percentage point during the next three meetings.
Information about the emergency meeting appeared on the Fed's website on Friday, at the end of the trading week. The report indicates that the Fed's Board of Governors will meet behind closed doors to discuss future interest rates, as well as the level of discount rates at which commercial banks receive loans from the regulator. At the same time, the issue of the base rate is not on the agenda. Despite this circumstance, some experts drew an analogy with the events of almost 7 years ago. According to them, the Fed has already held a similar meeting with the same agenda in November 2015, where the interest rate on federal funds was increased by 25 basis points exactly three weeks later. This step was the first in a cycle of increases. Over the next three years, the rate was increased by another 2%.
Given this backstory and the unprecedented pace of US inflation, many analysts assumed that the federal funds rate will rise faster in the coming months than during the above cycle. In particular, markets are pricing in a 50-point rate hike following the March meeting. Futures quotes for the Fed rate have already provided almost 90% probability of this scenario. Moreover, after Friday's announcement of an emergency meeting, the market has priced in almost a 30% chance of an emergency rate hike. And although experts admit that this step will be an emergency (the last time the regulator decided on an emergency increase was in 1979), this scenario cannot be ruled out. But apart from such unlikely scenarios, it must be recognized that hawkish expectations about the Fed's future actions are intensifying. In particular, Goldman Sachs' analysts are confident that the Fed will increase the rate at every meeting this year, that is, 7 times since the March 50-point increase. One of the scenarios also assumes an emergency increase of 25 basis points at today's emergency meeting and another 25 (and further during the year) following the results of the planned March meeting.
Against this hawkish background, the latest statements by the ECB President, Christine Lagarde, look quite contrasting. Last Friday, she said that raising the main interest rate under the current conditions will not reduce record-high inflation in the eurozone and will only harm the European economy. According to her, financial markets "should moderate their enthusiasm" and not include in prices faster than previously expected rates of interest rate hikes in Europe. After these words, the euro was under quite strong pressure. During today's US session, Christine Lagarde will make a report in the European Parliament. She will likely repeat her rhetoric from last Friday, putting additional pressure on the euro.
We believe that short positions for the EUR/USD pair are still a priority, given the increasing decorrelation of the positions of the Fed and the ECB. The nearest downward target is the round and psychologically important level of 1.1300, which corresponds to the lower border of the Kumo cloud on the 4-hour timeframe and the Tenkan-sen line on the weekly timeframe.
