- According to forex trading, the EUR/USD exchange rate reached its highest level since January last week.
- A lower close on Friday will disappoint the “bulls” and could indicate that the recent outperformance is at risk of fading.
Recently, the price of the euro against the US dollar EUR/USD was stable around the 1.0925 level, and its recent gains reached the 1.0982 resistance level, the highest resistance level for the currency pair in two months. Technically, the Relative Strength Index (RSI) has turned lower, after approaching overbought levels at 70, indicating a possible pullback in this week's trading. For now, any weakness will be considered temporary in nature and will be classified as consolidation, as the broader technical setup remains constructive. We tend to view the major moving averages as an indicator of where momentum is, and the EUR/USD price is sitting above the 50-, 100- and 200-day moving averages. Only when the pair starts to fall below these levels will we put the EUR/USD rate on alert for a broader decline.
According to the economic calendar:
The key EUR/USD events this week are the release of US inflation figures for February on Tuesday and US retail sales on Thursday. Currently, the market is expecting the CPI reading to come in at 0.4% on a monthly basis and 3.1% on an annual basis. The core CPI figure could be more important, with a 0.3% monthly and 3.7% annual reading expected.
As for inflation, expectations for February point to only a very slight slowdown, so the risks here are more balanced against consensus estimates. We believe this will stop the correction in US interest rate cut expectations before the FOMC meeting on March 19-20.
Given the strong sell-off in the US dollar in recent days, the bigger surprise would be an above-consensus reading, as this would undermine the narrative that all signs are now pointing to a June rate cut. Therefore, we would expect the bigger reaction in USD to be on the upside (GBP downside). Clearly, any dip in the value would allow for an extension of the recent trend of the currency weakening.
In general, investors will pay particular attention to any upward surprises from US inflation data, which could support the US dollar before the FOMC meeting on March 20. In fact, we could see US interest rate markets reevaluating the Fed's expectations in response to the strongest inflation record to date. This enhances the attractiveness of the US dollar price.
US retail sales are expected to come in at 0.5% MoM in February, and again, we would envisage a bigger USD reaction to the upside on any above consensus reading. Ahead of that, the US dollar enters a new week amid renewed confidence that the Federal Reserve will cut interest rates in June. In fact, the 25-basis point cut has now been fully priced in for June after last week's US jobs report showed an easing of wage pressures.
For his part, Federal Reserve Chairman Jerome Powell told lawmakers last week: “We are waiting to become more confident that inflation is moving sustainably to 2 percent.” He added, “When we gain this confidence, and we are not far from it, it will be appropriate to reduce the level of restrictions so as not to push the economy into recession.”
Keep an eye on broader risk sentiment over the coming days, as the US dollar price now appears to be responding to the continued improvement in sentiment.
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