The upside momentum of EUR/USD has faded, but the overall uptrend continues, bringing optimism to euro bulls. Yesterday, the pair advanced in the 1.0800 area. Now, bulls set their sights on the resistance level of 1.0930 which is also the upper band of the Bollinger Bands indicator and the upper boundary of the Kumo cloud on the weekly charts. The next target is 1.1000, the key obstacle for upward moment during this uptrend.
The pair is relatively close to these targets, with only 200 pips separating it from 1.1000. Earlier, the pair moved up by almost 400 pips. The pair's 2023 low is currently at 1.0485, and the high of this year is at 1.0870. This suggests the pair could easily hit both the intermediate resistance level of 1.0930 and the target at 1.1000.
Increased dovish expectations
Overall, the fundamentals suggest the pair will continue to rise. During the first two weeks of January, key macroeconomic labor market and inflation data were released in the US. These data will be considered by Fed policymakers at their first meeting of 2023 on February 1. It appears that the Fed will slow down the pace of interest rate hikes based on these reports. The market is already very confident that the Fed will raise rates by only 25 basis points in February: the CME FedWatch Tool is already pricing in a 93% probability of that outcome. There is only a 7% chance of a 50-point hike.
It only took a week for the odds to tilt in favor of the dovish scenario. As recently as a week ago, on the eve of the release of non-farm payrolls last Friday, the market was pricing in a 50/50 chance of such an outcome. However, mixed US labor market data, as well as disappointing ISM services and manufacturing PMI reports, raised the probability of a 25-point scenario to 77%. Yesterday's inflation release finally convinced the markets that the pace of rate hikes will be reduced again, from 50 to 25 basis points.
Given such market expectations, it would be difficult for the Fed to make an entirely different policy decision without risking severe volatility in the markets. Nevertheless, not all Fed officials are dovish policy mouthpieces. For instance, both Raphael Bostic and Mary Daly argued on Monday that a 50-point hike should not be off the table, and that interest rates during the current tightening cycle will peak in the 5.0%-5.25% range. However, these statements preceded the latest inflation data. So far, only Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, spoke out in favor of slowing down the pace of rate moves. He stated that he was ready to downshift to 25 basis point hikes. According to Harker, the inflationary spike has peaked, the labor market is in great shape, and thus the time for massive rate hikes is over.
Fed vs. ECB
Harker's statement will be a major recurrent theme of the February meeting, in my opinion. Indeed, the latest non-farm payrolls were in positive territory, let down only by slower average wage growth. Meanwhile, unemployment in the US has fallen to 3.5% while job growth is slowing rather smoothly. All inflation indexes, such as the consumer price index and the core PCE, are falling, allowing the Fed to seriously consider a 25-point hike option.
At the same time the euro is supported by the ECB, whose representatives keep voicing hawkish messages. The latest CPI data for the eurozone reflects a mixed picture, with core inflation continuing to rise while overall inflation is slowing down due to lower energy prices. This disappointing result is forcing the ECB to continue raising rates by 50 bps. Judging by the rhetoric of ECB officials, the central bank is ready to raise rates by a total of 100 basis points following the next two meetings.
Conclusion
The current fundamentals are pushing up EUR/USD. Ahead of the 10-day blackout period for FOMC members, the regulator's representatives will be actively making comments on the latest macroeconomic data. If Patrick Harker's stance becomes predominant, the US dollar will be under extra pressure as the outcome of the Fed meeting in February will be, in fact, a foregone conclusion. At the same time this begs the question: is the regulator ready to revise its target range downwards? Naturally, this will put pressure on the greenback, allowing EUR/USD bulls to go on the counterattack.
Regarding the current situation, the current retracement of EUR/USD is mainly due to the Friday effect. Traders take profits and close their positions as the pair remains at its highest level in months. At the same time, the uptrend remains in force, and the nearest target is located at 1.0930. The upper band of the Bollinger Bands indicator and upper boundary of the Kumo cloud are both located there.
