Powell’s Remarks Shake the USD. Is the Rate Hike Cycle Over?

EUR/USD in Pullback Mode Ahead of Non-Farm Payrolls.

The dollar had a rocky Friday as market participants tried to digest Fed Chair Powell’s remarks made in a speech where he touched on the ever-sensitive topic of the rate.

Although the Chair noted that the economy is slowing down due to the restrictive monetary policy, he iterated that “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease”. However, this led many traders to believe that the rate hikes have concluded.

According to CME’s FedWatch tool, there’s a 53.7% chance of a rate cut in March. This probability is up from just 21% a week ago. The key event this week will be the release of the always-important U.S. jobs data, which could further sway the currency markets and affect the rate outlook.

Key Data for the Week Ahead

Monday at 2:00 pm GMT, ECB President Christine Lagarde will speak at the Academy of Moral and Political Sciences, in Paris. The topic is monetary policy, thus the event is likely to trigger volatility in EUR pairs.

Tuesday at 3:00 pm GMT we take a look at the ISM Services PMI, which is a leading indicator of economic health. A reading above 50.0 indicates economic expansion; the expected figure is 52.5, while the previous was 51.8.

The ADP Non-Farm Employment Change report will be released Wednesday at 1:15 pm GMT and will provide an early look into the U.S. employment situation.

The main event of the week will be the release of the Non-Farm Payrolls (NFP) report, scheduled for Friday at 1:30 pm GMT. The report will be accompanied by the Average Hourly Earnings and Unemployment Rate. Together, these three indicators try to paint an accurate picture of the labor market in the United States and usually create volatility due to the close relationship between jobs and rates.

Technical Outlook – EUR/USD

The resistance at 1.1000 offered a picture-perfect rejection last week. The pair climbed as high as 1.1017 and then dropped to a low of 1.0828 and is currently trading at 1.0865.

The Relative Strength Index was overbought for a while, warning that a pullback would come. Adding to the probability of a drop was the bearish divergence: the price was constantly making higher highs while the RSI was bouncing at the same level.

The overall bias is bullish, as the US Dollar seems to have lost its momentum. Friday’s candle shows a long wick on its lower side, indicating rejection and hinting that the pullback may be over. If Friday’s low is broken, the pair may continue closer to the next support but for the time being, the resistance at 1.1000 remains the most important level.