Softer US Inflation Shifts Focus to Core PCE, FOMC Minutes

EUR/USD: RSI hovers mid-range as price action remains choppy

The dollar ended last week mostly flat after Friday’s Consumer Price Index (CPI) report posted a lower-than-expected reading, at 0.2%. On a yearly basis, inflation in the U.S. is at 2.4%, lower than the anticipated 2.5% and the previous 2.7%.

Earlier in the week, the Non-Farm Payrolls (NFP) report showed that the U.S. labor market is on the right track, with 130K new jobs created during the previous month, while the forecast was 66K. The unemployment rate dropped to 4.3% from 4.4%, and the Average Hourly Earnings increased by 0.4%, more than the anticipated 0.3%.

Despite these surprising numbers, the market had a timid reaction, possibly due to uncertainty surrounding the next move of the Federal Reserve. At the time of writing, the CME FedWatch tool puts the probability of a rate cut at 51.2% in June, unchanged from a week ago and slightly higher than a month ago, when it was 46.7%

Economic Calendar Highlights

U.S. banks will be closed on Monday in observance of Presidents’ Day; volatility may be low due to the lack of major economic releases. The first important event of the week will be the release of the FOMC Meeting minutes, scheduled for Wednesday at 7:00 pm GMT. It’s a detailed record of the latest FOMC meeting and shows the reasons that determined the interest rate votes. The minutes typically provide insight into what the Fed is watching ahead of its next rate decision, meaning fresh clues could increase volatility.

Friday will be filled with Purchasing Managers’ Indexes (PMI) releases, starting with the German Manufacturing and Services PMIs at 8:30 am GMT and continuing with the UK Manufacturing and Services PMIs at 9:30 am GMT.

The main event of the day and possibly of the week will be the release of the U.S. Core PCE Price Index, scheduled for Friday at 1:30 pm GMT. This is the Fed’s preferred inflation measure, and its release usually creates high volatility. The last release of the week will be the U.S. Manufacturing and Services PMIs, scheduled at 2:45 pm GMT.

Technical Outlook – EUR/USD

The pair is stuck between 1.1800 support and 1.1900 resistance, as shown by the two perfect bounces since the beginning of the month. The dollar recovered after the top at 1.2080, and the pair seemed headed towards the lower Bollinger Band, but it stopped at the middle line. If this barrier is broken, then we may see an extended drop toward the lower band, which is located around 1.1700.

The RSI does not offer a lot of clues, hovering around the middle of its range, and price action is choppy. It looks like the pair will continue to trade sideways until a catalyst emerges. For now, 1.1800 remains support and 1.1900 resistance. A break of either of them will probably trigger an extended move in that direction.