U.S. Inflation Continues to Accelerate. EUR/USD Threatens Support Again
Last week’s Consumer Price Index showed that inflation in the U.S. is not subsiding, which means that a 75-bps rate hike is on the table. There’s been a lot of talk about the Fed’s next move and whether they will add 50 or 75 basis points to the rate but a higher than anticipated CPI and Core CPI tilts the balance towards another mega-hike.
The Federal Open Market Committee (FOMC) is expected to increase the rate to 3.25% (currently 2.50%) but it is also very important to see what kind of forward guidance they deliver. If more 75-bps hikes are announced, the Dollar is likely to accelerate against the Euro (and other majors), especially considering that the ECB has not yet adopted a very hawkish policy.
Key Events for the Week Ahead
Tuesday at 5:00 pm GMT, ECB President Lagarde will speak at an event organized by the Frankfurt Society for Trade, Industry, and Science. The expected impact is not huge but surprises can always happen, which calls for caution.
The main event of the week takes place Wednesday at 6:00 pm GMT: the FOMC Federal Funds Rate, the FOMC Statement, and the FOMC Economic Projections. These releases will be followed at 6:30 pm GMT by the usual press conference. Fed Chair Jerome Powell will read a prepared statement and then he will answer unscripted questions. This second part is the one that creates the most volatility because it usually reveals hints about the pace of future hikes.
Friday is PMI day for both the Euro and US Dollar: the German Flash Manufacturing and Services PMIs come out early at 7:30 pm GMT, followed at 1:45 pm GMT by the U.S. Manufacturing and Services PMIs. To wrap up the economic week, Fed Chair Powell will speak Friday afternoon at 6:00 pm GMT.
Technical Outlook – EUR/USD
During last week’s post, we talked about a price gap and how these gaps are usually closed (meaning that the price will return to where the gap originated). This scenario came to fruition and the gap is now closed.
The drop that closed the gap was largely triggered by a higher than expected U.S. CPI, which sent the pair into the support zone around 0.9950. However, several technical factors contributed to the move south: the pair touched the upper Bollinger Band, a long-term bearish trend line, and the 50-day Moving Average.
Going forward, it’s likely that the EUR/USD pair will trade mostly in a range until the FOMC announces the new rate. A 75-bps hike combined with aggressive forward guidance will likely send EUR/USD lower, possibly breaking the 0.9863 low. On the other hand, if Chair Powell adopts a softer tone, the Dollar is likely to pull back a little, which will allow the pair to climb.