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The US inflation report has saved the EURUSD bears. The market was ready to sell the USD, but better-than-expected data revived the US currency. Let’s discuss it and make a trading plan.
Weekly fundamental forecast for dollar
Hope never dies. At least, it promises to hold until summer. The US February inflation report turned out hotter than expected but not hot enough to scare investors. As a result, fearless stock indexes updated all-time highs, and the EURUSD went on a roller coaster ride. The derivatives market has revised the odds of a federal funds rate cut in June from 71% to 66%, but they remain high. Summer is in the game, meaning the dollar’s fate is still fogged.
Only the increase in consumer prices of 0.4% MoM was in line with Bloomberg experts’ forecasts. On a year-on-year basis, the indicator of 3.2% exceeded the estimate of 3.1%. Core inflation slowed down to 3.8% y/y instead of 3.7%. Its 0.4% increase was also higher than expectations of +0.3% MoM. Although the general downtrend continues prevailing, January and February reports suggest that the Fed’s final round of the fight against inflation will be the most difficult. Reducing it from 9% to 3% is easier than from 3% to 2%.
US inflation trends
Source: Wall Street Journal.
Service prices slowed from 0.8% to 0.5% MoM, which became bad news for the EURUSD bears, not letting them drop the pair below 1.09. Besides, Citigroup and Morgan Stanley estimate that the core PCE, the Fed’s favorite inflation indicator, expanded 0.2-0.3% in February. That’s lower than +0.42% in January.
Some were surprised by the reaction of US stock indices, which marked new record highs, but the former Boston Fed President Eric Rosengren said that the latest inflation report would not change the Fed’s outlook.
The central bank still expects three monetary expansion acts starting from June. An updated FOMC forecast at a March 19-20 meeting will show whether that is true.
Even if market expectations for the federal funds rate have remained unchanged, changes in the Fed’s estimates can seriously impact the EURUSD. Will the central bank want to change its mind on the back of a stronger-than-expected US economy and accelerating inflation over the past two months? The American dollar will attack if the updated forecast presumes two monetary policy easing acts instead of three.
Market expectations of Fed rates
Source: Wall Street Journal.
The US February inflation report saved the EURUSD bears from defeat. If it had been in line with Bloomberg’s expectations, the main currency pair would have rushed above 1.1.
So far, the risks of reaching a new high in consumer prices are increasing, and so are the odds of a slower-than-expected fed monetary policy easing, meaning that the greenback will continue fighting.
Weekly trading plan for EURUSD
The euro’s failure to consolidate above $1.0915 will be a foundation for building up shorts opened at $1.097. The EURUSD will likely consolidate in the range of 1.088-1.097 until the FOMC’s 19-20 March meeting.
Price chart of EURUSD in real time mode
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