The EUR/USD pair showed sideways movement for the second consecutive week. Buyers tried to return to the area of the 1.08 figure (week high - 1.0806), sellers tried to pull the price into the area of the 1.06 figure (week low - 1.0696), but in the end, the price returned to its previous positions. The seventh figure became a point of attraction – a kind of "neutral territory" for indecisive traders.
This week, the most important event is the U.S. inflation data. In addition to the key report (Consumer Price Index), the US released the Producer Price Index, Import Price Index, and the Consumer Sentiment Index from the University of Michigan. Mixed results did not allow EUR/USD bears to organize a large and, most importantly, a firm downward movement. In addition, other economic reports (retail sales, industrial production, construction) acted as a counterweight, and most of them ended up in the "red."
But let's start with inflation. What did the CPI report tell us? All components of the report exceeded consensus estimates, and this fueled the dollar's broad strength. The growth was quite sharp but did not last long. In fact, this report did not provide substantial support for the greenback: overall inflation in January did not accelerate – on the contrary, it slowed down in annual terms. And the core CPI remained at the December level (3.9% YoY).
This report gave evidence that the Federal Reserve will keep all parameters of monetary policy unchanged. In addition, the CPI weakened dovish expectations regarding the results of the May meeting. The probability of easing monetary policy in May decreased from 55% to 35%, according to CME FedWatch Tool data.
In addition to the CPI data, the PPI also entered the "green territory." The overall PPI decreased to 0.9% on an annual basis, while most experts expected a more significant decrease (to 0.5%). The core index, after three consecutive months of decline, accelerated to 2.0% YoY (forecast - 1.6%).
The Import Price Index has been in negative territory since February 2023. It remained below zero in January 2024 but rose to -1.3%, compared to the forecasted decline to -1.9%. On a monthly basis, the index sharply increased, setting a new annual high (0.8%).
The Consumer Sentiment Index from the University of Michigan rose to 79.6 (the highest value since July 2021), but most analysts expected to see this figure at 80.0.
As we can see, inflation indicators mostly worked in favor of the US dollar. This made it possible for the bears to update the three-month low and test the 1.06 figure for the first time since November 2023. However, in the second half of the week, the bulls took the initiative again. Why? Firstly, due to the rise in risk sentiment. Secondly, due to weak economic reports on retail sales, production, and construction.
Thus, despite the "green tint" of the inflation data, the US stock market generally maintained an optimistic outlook: strong corporate earnings compensated for the negative effect of concerns related to the consistently high CPI.
However, economic reports (aside from inflation) did not boost the US dollar. In particular, the total retail sales volume decreased by 0.8% in January (forecasted decline of 0.2%). This is the weakest result since December 2022. Excluding auto sales, it also declined (by 0.6%, compared to the forecasted growth of 0.2%).
The US industrial production report was also disappointing. According to the data, the production volume contracted by 0.1% (forecasted growth of 0.2%). January's result is the weakest since October 2023 (in December and November, it was at the zero level). The manufacturing production volume decreased by 0.5% (forecast - 0.0%), and the capacity utilization rate dropped to 78.5% (forecast - 78.8%). It's worth noting that exceeding the 80% level is considered dangerous for developing inflationary pressure, while January's result (78.5%) is the weakest since February 2023.
The volume of building permits issued decreased by 1.5% in January, while most experts predicted an increase of 0.7%. The volume of housing starts in the US also decreased by almost 15% (14.8%), with a forecasted growth of 0.9%.
Disappointing economic reports mounted pressure on the greenback, making it possible for the bulls to seize the initiative and prevent the price from falling into the 1.06 figure.
Fed representatives also failed to support the dollar. In particular, Atlanta Fed President Raphael Bostic said that the Fed could consider a rate cut in the near future, but there is no current "urgency". He noted that inflation would decrease more slowly than traders expect, while the US labor market would remain "exceptionally strong." In his opinion, the interest rate cut will likely happen in the summer. Dallas Fed President Robert Kaplan expressed a similar position by saying that the Fed needs more time to assess the impact of economic weakness and financial market turmoil on the U.S; there is no urgency in cutting rates.
Perhaps the most accurate description of the current situation was given by former Boston Fed President Eric Rosengren. In his opinion, the market reacted too impulsively to the CPI report. He noted that while the indicators exceeded analysts' expectations, monetary policy is not built in accordance with analysts' expectations. According to Rosengren, "nothing in the report indicates anything other than a continued trend towards lower inflation".
Judging by the dynamics of EUR/USD, most market participants seem to have come to the same conclusion. Weak reports in the manufacturing, construction, and retail sectors only fueled interest in buying the pair.
In my opinion, next week, the bulls will try to reach the 1.08 figure. U.S. inflation did not become a catalyst for the greenback's growth, so the bulls will try to turn the situation in their favor. You should only consider long positions after the pair surpasses the resistance level of 1.0830 (the lower boundary of the Kumo cloud on the 1D timeframe). In that case, the next targets for the upward movement will be the levels of 1.0900 (upper Bollinger Bands line on the daily chart) and 1.0940 (the upper boundary of the Kumo cloud on the same timeframe).
