The US currency is in a state of unsteady equilibrium, taking a pause before the release of the next macro data. According to preliminary estimates, any changes in the US Consumer Price Index can influence the Federal Reserve's decision and trigger sharp fluctuations in the dollar's dynamics.
According to analysts, this week will be a turning point for the US central bank: it will either confirm how appropriate the monetary policy is or it could receive another argument in favor of further monetary tightening. Much will depend on the upcoming inflation reports. Preliminary forecasts suggest that the US CPI could drop to 5.2% from the previous 6%. This could be the lowest since May 2021, when inflation was at 5%. However, once it is confirmed, the Fed will proceed with its chosen strategy. In such a situation, the fight against inflation will be effective and not hinder economic activity.
Earlier, Fed representatives allowed for another rate hike in May this year. The likelihood of such a scenario will sharply increase if the US inflation reports are positive. Experts believe it will provide strong support to the dollar. However, in case the news on inflation disappoints the markets or the minutes of the latest FOMC meeting hint at too fast easing of MP, the situation will change. The greenback will go down and the EUR/USD pair will head toward 1.1000, the analysts warn.
The US currency took a break after rallying the day before, as traders and investors expect the Fed to have a hawkish stance towards monetary policy. Against this backdrop, the euro took revenge and significantly appreciated against the US dollar. On the morning of Tuesday, April 11, the EUR/USD pair traded at 1.0903. The day before, the pair attracted bears, sharply rising to the 1.0915 mark. However, now there is a trend towards a gradual decline.
Nevertheless, a combination of supportive factors helps the greenback stay afloat, while maintaining bearish pressure on the pair. As a result, the US Dollar Index (USDX), which records the dynamics of the greenback relative to a basket of world currencies, soared to a weekly high amid revived bets on further tightening of the Fed's monetary policy. Currently, the markets are pricing in a high probability of a 25 basis point rate hike at the next FOMC meeting, scheduled for May 2023.
On Tuesday, April 11, market participants are also waiting for the eurozone retail sales report. Preliminary estimates indicate that in February, this figure fell by 0.8% after a 0.3% increase in January. On Wednesday, April 12, the agenda includes US inflation reports and the minutes of the Fed's March meeting, which may contain hints regarding the central bank's next actions and an assessment of the economic situation. Currently, the majority of analysts (71.7%) expect a quarter point rate hike in May.
A new round of global central banks' meetings is scheduled for the end of this month and the beginning of the next. The key issues of the meetings are monetary policy and interest rates. Earlier, the Fed raised the latter by 25 basis points to 4.75%-5%. The European Central Bank followed suit, increasing the pace of the rate hike (by 50 basis points, to 3.5%). Take note that the current monetary policy of central banks is a fundamental factor in the development of the global currency market. At present, central banks are raising rates due to rising inflation, although this increases concerns about the onset of a recession.
Many market participants believe that the Fed will cut rates in the second half of 2023 amid slowing economic growth. Such a scenario would trigger a flight of investors to safe haven assets, primarily the USD. In addition, an additional rate hike by the ECB would support the single currency and limit the EUR/USD decline. As a result, the pair may get stuck at current levels or roll back to the two-month highs near 1.0970-1.0975, the analysts summarize.
