EUR/USD bulls march up to the gates of the Bear´s cage ahead of US CPI
- EUR/USD bulls are running higher into potential resistance.
- All eyes are on the Federal Reserve, European Central Bank, and Tuesday´s US Consumer Price Index, CPI.
EUR/USD is up by over 0.9% in midday trade on Wall Street aided by a weaker US Dollar and ahead of the European Central Bank's policy meeting on Thursday. Expectations call for the ECB to deliver a 50-basis point hike and hawkish rhetoric is assumed which is buoying the Single Currency which has traveled from a low of 1.0650 to a high of 1.0748 so far.
Meanwhile, the US Dollar continued to bleed heavily on Monday as markets bet the Federal Reserve will be less aggressive in raising interest rates to curb inflation. US authorities have made moves to try to lessen the damage from the recent collapse of Silicon Valley Bank.
A new Bank Term Funding Program will offer loans from the Federal Reserve of up to one year to depository institutions, backed by United States Treasuries and other assets these institutions hold.
Consequently, the US dollar index, or DXY, which measures the greenback vs. a basket of major currencies, has dropped to a fresh low of 103.484, tracking the fall in short-dated Treasury yields. The two-year note was paying as low as 3.997% at one point in New York trade and tumbled from the start of the week´s highs of 4.534% in the biggest one-day drop since the financial crisis of 2008, on track for its biggest three-day decline since the Black Monday crash of 1987. Meanwhile, Fed funds futures have been repriced as traders expect that the Fed's terminal rate will be lower. Markets are now pricing as low as 4.14% for December which was originally priced above 5% on Friday. Moreover, futures are showing a 21% chance of no hikes in rates from the Federal Open Market Committee when announcements will be made on March 22.
US Consumer Price Index will be key
This all makes for a very important red calendar event this week in the US Consumer Price Index data. This will be released on Tuesday morning in the US session and traders will use the data to speculate how the Federal Reserve will react later this month when the central bank will meet to decide on its interest rate setting.
´´The release of US CPI inflation data tomorrow is expected to show headline price pressures remains elevated at 6% YoY, well above the Fed’s 2% Inflation forecast,´´ analysts at Rabobank said. ´´If the Fed were to back away from its tightening cycle, it may have a credibility issue on its hands. Additionally, for some years Fed officials have argued that monetary policy is not the right tool to tackle financial stability,´´ the analysts noted.
´´Given the announcement that the Fed has made over the weekend in conjunction with the Treasury to stop contagion risks from the SVB crisis, the FOMC may favor continuing to hike rates next week with a focus on the inflation risks,´´ the analysts at Rabobank argued.
´´We maintain our 1- and 3-month forecasts of EUR/USD 1.06 and 1.06 respectively, though clearly, we will be watching the forward guidance at this month’s Federal Reserve (and ECB) policy meetings closely,´´ the analysts explained.
EUR/USD technical analysis
There appears to be more gas in the tank for the Euro at this stage but it is running low. EUR/USD approaches a key resistance area and has left territory behind hastily that might require a correction in order to mitigate uneven grounds in EUR/USD´s bids and offers between 1.0600-1.0650 on the daily chart:
On the EUR/USD hourly chart, a 50% mean reversion of the prior bullish impulse meets the trendline support near 1.07 the figure:
A break of the EUR/USD trendline could be the makings for the continuation of the distribution that appears to be taking place on the daily chart with the price on the backside of the prior dominant bullish trend.