The Fed Is Still Hawkish. Could We See Another 50-bps Hike?
Thin Monday – U.S. Markets Closed, EUR/USD Lingers at Support
The U.S. economy is still firing on all cylinders, as evidenced by last week’s inflation and retail sales data, which could push the Fed’s peak rate higher. The Consumer Price Index exceeded the 6.2% forecast, showing an actual reading of 6.4%. This was lower than the previous 6.5% but apparently not low enough. The Retail Sales and Core version came out above expectations as well, sparking a new wave of hawkishness from Fed officials.
Loretta Mester (Cleveland Fed President) and James Bullard (St. Louis Fed President) both made comments that showed they do not exclude the possibility of adding 50 bps at the next rate meeting. The market is currently pricing in a 25-bps rate hike with a probability of 81.9%, according to CME’s FEDWATCH tool, so it would be quite a surprise to see the Fed making the bold move of adding 50 bps.
Key Data for the Week Ahead
U.S. markets will be closed Monday, in celebration of Presidents’ Day; this will likely affect volatility but it’s uncertain to what degree. Tuesday at 8:30 am GMT we take a look at the German Manufacturing and Services PMIs, while later at 2:45 pm GMT, the same indicators for the U.S. economy will come out. The latter will probably have a bigger impact.
Wednesday at 7:00 pm GMT, the Fed will release the Minutes of their latest Meeting. The document contains details and insights into the reasons that determined the rate vote and can often provide clues for the next Fed move.
Thursday at 1:30 pm GMT we take a look at the U.S. Gross Domestic Product, but the most important event of the week lands Friday at 1:30 pm GMT: the Core PCE Price Index. This is rumored to be the Fed’s preferred inflation gauge and is expected to show a reading of 0.4%, compared to the previous 0.3%.
Technical Outlook – EUR/USD
The pair is currently trading at 1.0695, just above the support at 1.0635, which was touched Friday. The pullback that started at 1.1000 may extend further than 1.0635 but considering how things look right now, we may see a resumption of the uptrend started in late 2022.
The candles are showing indecision and rejection, and price action is taking place in a tight range. The pair has broken through the 50-day Moving Average but it looks like momentum is low and the bears are running out of steam. In other words, it’s likely that the pair will soon return above the MA.
A very important battle will be fought at 1.0775 and/or 1.0635. The break of either of these levels will probably indicate where the price will go in the medium term. A break of support would suggest that the US Dollar will make additional gains, while a break of 1.0775 could mean that the pullback is over.
