The Fed Undermines the US Dollar, Dials Back on Rates

EUR/USD Challenges 9-Month High.

The Euro hawks are spreading their wings and it looks like lately, it’s more ECB vs. Fed rather than EUR vs. USD as the two central banks’ policies diverge. The Fed is getting ready to slow the pace of the rate hikes considerably, while the ECB officials have announced plans to keep going for longer.

ECB council member Klaas Knot hinted that 50 basis points will be added in February and March and that the hikes will carry on after that. On the other side of the pond, Fed Governor Christopher Waller favors a 25-bps hike at the next meeting, saying that the decline in inflation suggests the policy is getting to the point of being “sufficiently restrictive”. There is inflation data on this week’s calendar, which will help clear the picture regarding the next Fed move.

Key Events for the Week Ahead

ECB President Lagarde will speak later today at the Deutsche Börse annual reception. The speech is scheduled at 5:45 pm GMT and although things should go smoothly, volatility could rise at that time.

Tuesday at 8:30 am GMT we take a look at European PMIs, namely the French Services PMI, German Manufacturing PMI, and German Services PMI. Later in the day, at 2:45 pm GMT, the U.S. Services and Manufacturing PMIs come out.

Thursday at 1:30 pm GMT the U.S. Advance GDP will be released, showing the change in the value of all goods and services produced by the economy. The main event of the week comes Friday at 1:30 pm GMT in the form of the U.S. Core PCE Price Index, which is one of the most important gauges of inflation. The CPI is usually released 10 or more days earlier and tends to garner all the attention but the PCE is the Fed’s preferred measure of inflation.

Technical Outlook – EUR/USD

The Euro cleared a 9-month high after a successful re-test of the previous resistance at 1.0775, now turned support. The pair is currently trading at 1.0910 and divergence is present, which means that a pullback will materialize sooner rather than later.

The RSI did not make a higher high for quite a while, but the price has been making constant higher highs. This is known as bearish divergence but the exact timing of the incumbent drop is difficult to predict accurately. It’s a time when the Fed – ECB battle is overshadowing the technical side of trading and since the ECB is more aggressive at the moment, the Euro is gaining ground.

The overall bias is bullish for EUR/USD but in the short term, we are likely to see pullbacks. The first target will be the zone created by the support at 1.0775 and the bullish trend line, followed by the 50-day Moving Average. To the north, the first resistance is located at 1.1000, followed by 1.1175.