The EUR/USD closed the trading week at 1.0546, on the wave of Friday's dollar rally. The benchmark PCE index provided significant support for the greenback: it was unexpectedly in the green zone, reflecting worrisome inflation trends for the Federal Reserve.
The new trump card of the dollar bulls
The published report suggested that in the near future the Fed will tighten its rhetoric, as the situation is clearly not unfolding according to the scenario of the central bank. Even before the report, rumors were circulating that the central bank could increase the rate by 50 points at the March meeting. These conversations were based on the statements of two Fed officials (Bullard and Mester). According to them, a 50-point rate hike in February would be appropriate. Amid such rhetoric, hawkish expectations regarding the further actions of the central bank intensified. The core PCE index only added fuel to the fire, reflecting the acceleration of inflation in the US. Such circumstances require the Fed to take retaliatory measures - the central bank can, for example, raise the upper limit of the current rate hike cycle.
However, they started talking about upward revision of the final rate back in mid-February, when the Consumer Price Index and the Producer Price Index reflected a slowdown in the rate of inflation decline. John Williams, who heads the New York Fed and has a permanent voting right in the Committee, said that the central bank could stop at the 5.5% mark instead of the previously declared target of 5.1%. Many of his colleagues (including Lorie Logan, Michelle Bowman, Patrick Harker, Thomas Barkin, Lisa Cook) also toughened their rhetoric, the essence of which is that the central bank "should be ready to continue raising the rate for a longer period than previously assumed".
It is noteworthy that even the centrists and representatives of the "dovish wing" of the Fed have changed the tone of their stance. For example, Board of Governors member Philip Jefferson lamented the wage record - in his opinion, wage growth in the US is too high to match a timely and sustainable return to the 2% inflation target.
The market reacted to all these statements accordingly: according to the CME FedWatch Tool, the probability of a 50-point rate hike in March is already 27%. On the one hand, the chances are low, but, on the other hand, a few weeks ago, traders did not consider this scenario at all.
All this suggests that the Fed remains a staunch ally of the greenback. On Friday, the US dollar index updated a 7-week high, reflecting increased demand for the US currency.
Euro follows the greenback
Assessing the future prospects for the pair, take note that the greenback determines the price movement vector: the euro is still the leading currency. Although quite recently - in January - the single currency set the trend, even amid a fairly strong position of the dollar. The situation changed after the February meeting of the European Central Bank and the release of data on inflation in the eurozone. In contrast to the United States, in the European region, inflation indicators are consistently declining, and even, so to speak, ahead of schedule. In particular, the CPI in the euro area came out at around 8.5% in January with a forecast of a decline to 9.0%. The German inflation indicators were also in the red zone, reflecting (confirming) general trends. Germany, by the way, accounts for about a quarter of all price data used to calculate inflation in the eurozone.
Such dynamics allows ECB representatives to keep the intrigue in their stance regarding the further actions of the central bank after the March 50-point rate hike (which was announced by ECB President Christine Lagarde at the February meeting). According to a number of currency strategists (in particular, Commerzbank), after the March 50-point increase, the ECB will reduce rates to 25 points in May. Moreover, a 25-point increase at the May meeting could be the final chord: at the level of 3.25%, perhaps the end of the rate hike process will be reached.
Conclusions
The pair continues to build a downtrend amid the general strengthening of the US currency and the euro's indifference. Underlying PCE index, which unexpectedly came out in the green zone, provoked a dollar rally, on the wave of which the bears were able to consolidate in the area of the 5th figure.
Looking at the pair's weekly chart, we can see that it has been in a downtrend for the fourth straight week: the price hit a multi-month high of 1.1034 at the end of January and then completely reversed. Considering the existing fundamental background, we can assume that the bears have not exhausted their potential. The stance of the Fed representatives is likely to get tougher, reinforcing the hawkish expectations of the market. The nearest support level is at 1.0500 (lower limit of the Kumo cloud on the daily chart). The main bearish target is 1.0450 (Bollinger Bands middle line on the weekly chart).
