Dollar Drifts Lower Ahead of Central Bank Bonanza
Fed Expected to Pause, ECB Still Going Strong.
The much anticipated FOMC Meeting is drawing closer and the US Dollar is gearing up for some wild swings. The European Central Bank will also convene this week, but unlike its U.S. counterpart, the central bank is expected to continue to tighten its policy.
The ECB is expected to raise the rate from the current 3.75% to 4.00%, while the Federal Reserve is likely to pause at the current 5.25%. At the time of writing, there’s a 78.7% chance the Fed will pause and a 21.3% chance that the rate will be hiked by 25 bps, according to CME’s FedWatch tool.
Key Data for the Week Ahead
Tuesday at 12:30 pm GMT we take a look at U.S. inflation with the release of the Consumer Price Index, which is expected to drop substantially from the current 4.9% to 4.1% (annualized figures). The monthly CPI is expected to drop from 0.4% to 0.2%.
The U.S. Producer Price Index (PPI) and Core PPI will be released Wednesday at 12:30 pm GMT but by far the more important release will come later in the day, at 6:00 pm GMT: the Federal Funds Rate. As mentioned above, the rate is expected to remain the same but the FOMC Statement and Economic Projections that come out at the same time will offer insights about the pace of future hikes or cuts. Fed Chair Powell will hold the usual press conference at 6:30 pm GMT and will probably offer forward guidance about the monetary policy and the fight to curb inflation.
The ECB will announce the interest rate Thursday at 12:15 pm GMT, followed at 12:45 pm GMT by a press conference held by ECB President Christine Lagarde. The U.S. Retail Sales will come out in-between these events, at 12:30 pm GMT.
The last release of the week will be the UoM Consumer Sentiment survey (Friday at 2:00 pm GMT) but its impact will probably be overshadowed by the rest of the major releases.
Technical Outlook – EUR/USD
The pair is currently trading at 1.0780 and the bulls are struggling to break the resistance at 1.0775 after a bounce at 1.0635 support. Given the importance of the Fed and ECB meetings, we may see a waiting game between the bulls and bears until they see a clearer picture.
The two S/R levels mentioned earlier acted as perfect barriers each time they were touched. This means that a clear break will bring in additional buyers or sellers, depending on the direction of the break. The RSI is moving upwards but the pair is trading below the 50-day MA, so there’s no clear bias.
The pair’s next medium-term direction will likely be determined by the data released this week and by the forward guidance offered by the Central Bank heads.
