Sticky Inflation Lowers Rate Cut Expectations. FOMC Ahead

EUR/USD: Break and Retest. What Will Be the Outcome?

Last week’s data mostly favored the US Dollar and added more steam to the bulls’ hype train. The CPI came above expectations, showing that inflation is still sticky and dialing back rate-cut speculation.

Earlier in the year, the market largely agreed that the Fed would deliver north of 150 bps of rate cuts but after the mentioned CPI data and the better-than-expected NFP earlier in the month, these expectations dropped at just about 80 bps for 2024. According to the CME FedWatch tool, there’s a 90% probability that the Fed will keep the rate unchanged at their March meeting.

This recent “shakeup” of the FOMC predicted rate changes has been well received by the greenback, as shown by the US Dollar Index (DXY) which is up almost 2.0% percent in the last 3 weeks. The week ahead is sprinkled with some interesting data, which may change the dollar behavior and add more volatility.

Economic Calendar Highlights

On Monday U.S. banks will be closed in observance of Presidents’ Day and no major data will come out. The action will pick up Wednesday with the release of the FOMC Meeting Minutes, which will offer insights into the reasons that determined the latest rate vote. More importantly, the wording of the document usually provides clues about the path of future rate changes. If this is the case, we may see interesting action on USD charts. The release is scheduled at 7:00 pm GMT.

Thursday morning we take a look at European Manufacturing and Services PMIs, while later in the day, at 2:45 pm GMT, the homolog indicators for the U.S. economy will be released.

The last notable release of the week will be the German IFO Business Climate, which is a survey of about 9,000 businesses that gauges the respondents’ opinions regarding the relative level of economic conditions and 6-month expectations. The release is scheduled for Friday at 9:00 am GMT.

Technical Outlook – EUR/USD

The pair dropped to a low of 1.0695, breaking the support at 1.0775 and remaining below the bearish trend line seen in the chart below. Currently, the Euro bulls have taken short-term control, moving the pair back up into the previous support at 1.0775.

Oftentimes, after a break of an important S/R level, the price returns to re-test the said level, and the next direction is then decided. If the price bounces and then continues in the direction of the initial break, we are dealing with a “true” break and we can expect stronger movement in that direction. If the re-test results in a move back above/below the level, then the break was false.

This is exactly what we are seeing now with 1.0775. EUR/USD is back up, re-testing it after an initial break. The way the pair behaves early this week will offer important clues about future price direction.