EUR/USD Soft as Markets Brace for US Inflation & the ECB

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US Inflation

Markets brace for another Inflation update from the United States, in the form of February's Consumer Price Index (CPI) at 13:30 GMT today, ahead of next week's monetary policy decision by the Federal Reserve (Fed).

The previous release had showed that Core CPI had climbed 6% year-over-year in January, while the headline figure had surged 7.5% year-over-year – both the highest levels since the early 80s.

The Fed's preferred gauge of inflation though, is the Core Personal Consumption Expenditures (PCE), which had also risen to the highest since the early 80s, with a 5.2% year-over-year print in January.

The surge in consumer prices has led the Fed to an aggressive tightening path and a potential rate lift-off next week, while the asset purchase program is expected to end this week.

European Central Bank

The European Central Bank (ECB) hands down its monetary policy decision today at 12:45 GMT, while the publication of the updated staff macroeconomic projections is scheduled at 14:30.

No policy changes are expected, since the central bank has already provided a road map for a reduction in its asset purchases. The Pandemic Emergency Purchase Programme (PEPP) will be discontinued at the end of the month while the smaller Asset Purchase Programme (APP) will amount to €40 billion in the second quarter and diminish over the next quarters. [1]

An increase in rate hikes is still far away, but Ms Lagarde had made a hawkish pivot in February, by not ruling out a hike within the year. [2]

Her press conference today (13:30 GMT) will be closely watched, for any fresh thoughts around the interest rates and we will be waiting to see if there will be any mention to the exchange rate, given EUR/USD's recent drop close to parity.

Any potential commentary around Ukraine will also be closely watched, as the war can drive inflation higher, but it can also be a drag on economic growth, complicating the central bank's task.

EUR/USD

The pair staged a two-day recovery on hopes for a diplomatic solution from news of a meeting between the Foreign Ministers of Ukraine and Russia, which is expected to take place today.

Furthermore, the European Commission unveiled a plan to reduce its reliance on Russian energy, refraining from an outright ban [3], as the one announced from US President Biden [4].

The common currency's advance over the last couple of days has brought key 1.1190-1.1210 region in the spotlight, which includes the EMA200 and the descending trend-line from this year's highs. A fresh catalyst will be need however for test of these levels, above which the downward bias would pause.

Despite recent rebound, EUR/USD is soft today and remains in a precarious position, since it can't stay above the 38.2% Fibonacci of the 2022 High/Low decline. As such it is vulnerable to fresh pressure towards 1,0900, but bears will likely need fresh impetus for new 2022 lows (1.0805).

Caution is needed, since today's events have the potential to spur volatility and produce outsized moves, while markets also monitor the situation in Ukraine.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 10 Mar 2022 https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp220203~90fbe94662.en.html

2

Retrieved 10 Mar 2022 https://www.ecb.europa.eu/press/pressconf/2022/html/ecb.is220203~ca7001dec0.en.html

3

Retrieved 10 Mar 2022 https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1511

4

Retrieved 01 Jul 2022 https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/03/08/remarks-by-president-biden-announcing-u-s-ban-on-imports-of-russian-oil-liquefied-natural-gas-and-coal/

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