"One step forward, two steps back" - that's how you can characterize the dynamics of the EUR/USD pair's downtrend in recent days. Every step is quite difficult for the bears - they are trying to go down to the base of the 6th figure, but still could not gain a foothold in this price area, despite all the attempts. After the bearish attack there was a pullback, and the bears had to conquer the intractable levels.
Nevertheless, we still have the same result for the US currency: the pair is increasingly approaching the limits of the seventh figure, not to mention higher values. The pair gradually, with deep price pullbacks, but still pushes through price levels, despite the counter attacks of EUR/USD bulls.
Hawks spread their wings
The general information trend of recent days is an increase in the hawkish mood regarding the Federal Reserve's further actions. More recently – one and a half to two weeks ago - the market was confident that the Fed would tighten monetary policy again after the March meeting, increasing the rate by 25 points. The probability of implementing this scenario was 95% (according to the CME FedWatch Tool). To date, this probability has decreased to 74%. But not because the market doubted the Fed's hawkish intentions – the probability of implementing a more aggressive scenario involving a 50-point increase in the interest rate is gradually increasing. In just a week, the odds have increased from zero to 26%. Accordingly, hawkish expectations regarding the possible outcomes of subsequent meetings have also increased. For example, the probability that the rate will be increased to 5.75% in June is already almost 15%. More recently, traders did not take into account this height at all.
Such tectonic shifts did not occur immediately: at first Fed Chairman Jerome Powell was concerned about the slow pace of decline in inflation, then the US January inflation figures came out in the green zone (consumer price index and producer price index), thereby justifying Powell's concern. After that, the Nonfarm data turned out to be quite strong. All these factors are like puzzles put together in one picture, reinforcing hawkish expectations. And if earlier representatives of the Fed talked only about prolonging the current cycle of monetary tightening (in the context of revising the level of the final rate while maintaining a 25-point pace), now other signals are already sounding.
Transparent hints
Both Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard said they favored a 50 basis point rate hike at the last meeting. Here we can talk about a kind of subtle diplomatic move: on the one hand, Mester and Bullard refrained from calling for an acceleration in the pace of rate hikes, but on the other hand, they made it clear that following the February meeting, the central bank had every reason for such a step.
I would like to note that the February meeting was held even before the release of the January inflation indicators. And when the published reports reflected a slowdown in the rate of decline in inflation, many Fed representatives came to an uncomplicated conclusion, the essence of which can be summed up in one phrase: "the main risk for the Fed is not the onset of a recession, but that inflation will not decrease or accelerate again in 2023."
Such a doctrinal understanding of the current situation suggests that the central bank may return to the 50-point rate of monetary tightening, and the final rate level may well be at around 5.75%.
But, to the disappointment of the EUR/USD bears, such conclusions are too shaky. The general tone of the Fed's rhetoric, of course, has tightened, but it is too early to draw categorical far-reaching conclusions from this. Actually, that's why bears are not able to confidently develop the attack now – traders rush to lock in profits at every opportunity (when reaching the next price milestone), without risking staying at the base of the 6th figure for a long time. While for further progress to the downside, it is necessary not only to overcome the support level of 1.0570 (the lower line of the Bollinger Bands indicator on the 1D chart), but also to gain a foothold below this target.
Conclusions
In general, short positions on the pair would be better, due to the strengthening hawkish mood of the Fed. But the bears need an information boost to develop their attack. If the minutes of the February FOMC meeting doesn't do the trick then all the hope (in the context of the current week) is on the benchmark PCE index which will be released on Friday, February 24. Considering the current fundamental picture of the pair, it is advisable to use the price surges as a reason to open short positions. The initial bearish targets are 1.0600 and 1.0570 (bottom line of the Bollinger Bands indicator on the 1D chart).
