The Dollar Flexes as Fed Renews Vows to Fight Inflation

EUR/USD Below Parity Ahead of European Inflation, U.S. Non-Farm Payrolls

As largely anticipated, during Friday’s speech, Fed’s Powell adopted a hawkish stance on fighting inflation, which entails that more rate hikes are scheduled. He mentioned that a tight monetary policy will be needed “for some time” and that he expects “some pain” for businesses and households, as well as a weaker labor market.

While it’s almost clear that a new hike is coming in September, Jerome Powell did not offer any clues about the debate regarding the size of the hike. Thus it is still unclear whether we will see a 50-bps hike or a more aggressive 75-bps one but what we know so far is that the Fed will move as high as needed in order to bring inflation down to the desired 2.0%.

Key Events for the Week Ahead

As Fed Chair Powell suggested, the U.S. jobs market will likely be affected by the Fed’s tight monetary policy. The always-important Non-Farm Employment Change (aka Non-Farm Payrolls) report is due for release Friday at 12:30 pm GMT and will be a good indication of where the labor market is going. For the past few months the job situation has improved in the U.S. but this time, the forecast is gloomy: 295K new jobs as opposed to the previous 528K.

A few other highlights need to be digested by traders before the NFP comes out. Tuesday at 12:00 pm GMT the German Preliminary CPI will be released, with an anticipated increase from the previous 7.5% to 7.8% (YoY). The same day at 2:00 pm GMT, the U.S. Consumer Confidence survey comes out, showing the opinions of about 3,000 households about the overall economic situation.

The Eurozone CPI Flash Estimate is scheduled for release Wednesday at 9:00 am GMT. Although this is a key inflation measure, its impact is sometimes lowered by the fact that some of the most important countries in Europe release the same data earlier (Germany, France, etc.).

Technical Outlook – EUR/USD

The pair dipped below the previous low (0.9952) and printed a fresh one at 0.9899. Friday was an interesting day as the pair initially moved higher, due to a weaker U.S. Core PCE Price Index, but after the short-lived spike up, the price reversed as the US Dollar benefited from a hawkish Powell.

The previous low could be considered support and now that it is broken, the pair is in “uncharted” territory. The next potential support is located in the 0.9600 area but the pair last touched those levels in late 2002, so we don’t know how it will react if it gets there.

The RSI is approaching oversold on a Daily chart but it is already oversold on the Weekly and Monthly charts. This suggests that we may see rallies at some point but it is by no means a sure indication to buy because the pair can move in the same direction even if the indicators show oversold.