Dollar Retreats as Fed Silence Cools Rate Hike Bets

EUR/USD rebounds from the 1.1100 support zone, with 1.1200 a key level to reclaim.

The US Consumer Price Index (CPI) shook the Forex market last week, sending the US Dollar Index (DXY) as high as 102.94 and EUR/USD as low as 1.1112. The dollar’s strength has since subsided, and the week ended lower, after 4 consecutive weeks of gains.

The CPI showed that inflation is still hotter than the Fed would like it. However, on Friday, Fed Chair Warsh participated in the Annual Meetings of the International Monetary Fund in Bangkok and refrained from providing any monetary forward guidance.

The lack of clues regarding the next rate hike rattled the markets and diminished the odds of a rate hike in October. At the time of writing, the probability of a 25 bps rate increase is only 15%. For the December meeting, the picture is very different, as markets have almost fully priced in a rate hike. The odds for a hold are just 11% according to the CME FedWatch tool.

Economic Calendar Highlights

We are headed into a rather dull economic week, with only a handful of notable releases. The British Retail Sales will be released on Friday at 6:00 am GMT, followed by the European Services and Manufacturing Purchasing Managers’ Indexes (PMI) at 7:15 am GMT. The British PMIs will be released at 8:30 am GMT, and the last event in the series will be the release of the same indicators for the US economy at 1:45 pm GMT.

The Purchasing Managers’ Index (PMI) is a survey that asks respondents to assess business conditions in the respective sector, and it’s a leading indicator of economic health. However, its impact on the market is rather limited unless there’s a big difference between the forecast and the actual number.

The US Consumer Sentiment and Inflation Expectations surveys will be released on Friday at 2:00 pm GMT. These surveys do not have a massive impact, but in a slow week, their importance may be higher.

Technical Outlook – EUR/USD

After traveling below 1.1200, the pair entered oversold and it is now completing a pullback. The current bullish move is not necessarily a sign of reversal, but rather a normal retracement after an extended move.

Friday’s daily candle shows a long upper wick and a small body, which is already a sign of rejection and possibly bearish pressure. The first potential resistance is located near 1.1350, but this level is not confirmed yet. It was support, as it rejected falling prices twice, and it can become resistance if the price climbs to it.

A return below 1.1200 with volume would open the door for a move into last week’s low, located at 1.1112. This is a support zone, which extends around 1.1100, rather than an exact value.