12.02.202400:03 Forex Analysis & Reviews: EUR/USD. Preview of the week. Inflation, inflation and again inflation

Last week, the EUR/USD pair essentially treaded water, moving in circles within the 7-figure range. In the end, the price returned to its original positions (opening price at 1.0785, closing price at 1.0786). Trader apathy was driven by several fundamental factors: a semi-empty economic calendar, and the fact that representatives of the Federal Reserve and the European Central Bank reiterated information that traders already worked out. Therefore, both sellers and buyers took a "timeout": over the course of five trading days, the pair exhibited a sideways movement, reflecting how indecisive traders are.

The upcoming week will be drastically different from the previous one. As they say, "in form and in content": a busy economic calendar will provoke strong volatility, which will likely push the pair out of the 7-figure range. The only question is whether the pair will move up or down. Inflation will provide an answer to this.

Several inflation indicators will be published in the United States over the next few days. The most significant report will be released on Tuesday, February 13. On this day, we will learn the January value of the Consumer Price Index (CPI). Based on the preliminary forecasts, this report will not support the dollar. According to most experts, the CPI is expected to slow down quite sharply – to 2.9% on an annual basis, after it climbed to 3.4% in December. If the indicator matches forecasts, it will set a multi-month low (the weakest growth rate since April 2021). Take note that overall inflation has been accelerating in recent months, so such a sharp decline could exert significant pressure on the greenback.

The core index, excluding food and energy prices, has been showing a consistent downward trend for the past 9 months, reaching 3.9% on an annual basis in December. January may become the tenth month in this series: according to forecasts, the indicator will fall to 3.8% (the lowest growth rate since June 2021).

In addition to the CPI, the Producer Price Index will also be released (Friday, February 16). This report also does not bode well for the dollar. According to forecasts, PPI will decrease in January to 0.7% on an annual basis (the lowest value since June 2023 when the indicator reached 0.2%). The core index is expected to demonstrate a downward trend, dropping to 1.6% (the weakest growth rate since January 2021).

On the same day (Friday), the University of Michigan will release a report on inflation expectations. This indicator shows the expected annual inflation one year ahead. The indicator sharply declined in December (from 4.5% in November to 3.1%) and decreased again in January (2.9%). According to consensus estimates, there will also be a downward trend in February (2.8%).

Thus, if we believe the forecasts, all the above-mentioned inflation reports will reflect a slowdown in US inflation. Why is this important in the current circumstances?

It is important to emphasize that the outcome of the March FOMC meeting is predetermined – regardless of the dynamics of inflation in January. The fate of the May meeting is at stake. Of course, January figures do not directly predetermine the results of the May meeting, but they can significantly strengthen/weaken the degree of dovish expectations. Currently, the probability of a rate cut in May is at 52%. In other words, the market estimates the chances as roughly 50/50. The outcome of the upcoming week will tilt the scales in one direction or another. Accordingly, the dollar will swing in one direction or the other.

Note that despite fairly hawkish messages from Fed officials, the EUR/USD pair treaded water last week. The reason is that all calls from Fed members to "exercise patience" regarding rate cuts were voiced in the context of the March meeting, the results of which are already predetermined. Whereas the January report will allow reasoning about the prospects of the next meeting in a more practical light. This is why inflation reports (especially CPI) will undoubtedly fuel volatility for the EUR/USD pair, especially if they deviate from the forecast level.

To revive the downtrend, the bears need to settle below the support level of 1.0720 (the lower line of the Bollinger Bands indicator on the daily chart). In this case, the next target will be the level of 1.0620 (the middle line of the Bollinger Bands on the MN timeframe). You may consider long positions after the bulls settle above the target of 1.0820 (the lower boundary of the Kumo cloud on the daily chart). In this case, the bulls will have the opportunity to push the pair towards the 9th figure.

So, the focus is on inflation. The CPI will set the tone for trading and determine the price's direction in the medium term, especially if the report comes out in the red/green zone.