12.03.202400:50 Forex Analysis & Reviews: US inflation and the Fed Funds rate

The likelihood of a quick shift to a more accommodative monetary policy in the United States continues to fall. I have repeatedly mentioned that the market had long expected the Federal Reserve to lower rates in March. I said that it was too early, as US inflation remains too high, and the economy is too overheated. Unfortunately, the market did not take these facts into account. Later, when it became clear that the Fed would not lower interest rates in March, the market continued to be stubborn, as they refused to increase demand for the dollar.

The current wave pattern for the EUR/USD instrument remains intact. Corrective Wave 2 has not taken an excessively elongated form. It could have ended around the level of 1.0956, suggesting that the euro would fall further. The interest in the US dollar is fueled by information that the European Central Bank may start lowering rates in June. However, the situation with the Fed is not as clear-cut.

If the market previously expected the first rate cut would happen in March, now it's expecting it in June. However, this is not guaranteed. According to the CME FedWatch Tool, market participants are pricing a 54.6% chance of a U.S. rate cut in June. In other words, it's a 50-50 chance. When the market is confident (as with the expected cut in March), the probability exceeds 80%. Fed Chair Jerome Powell did everything possible last week to reduce market certainty. He said that there is no guarantee that inflation will reach 2%. I believe that he means that "we can keep rates on hold even longer."

The market has become more cautious in its expectations. Now it is not willing to go all-in with June, so it is adopting a cautious position. However, in any case, the Fed is taking a more hawkish stance than the ECB. Therefore, I still expect the EUR/USD pair to fall. The inflation report, set for release on Tuesday, could spoil the picture for the dollar, as did the Nonfarm Payrolls and unemployment reports on Friday. It's important to stay vigilant on Tuesday.

Wave analysis for EUR/USD:

Based on the conducted analysis of EUR/USD, I conclude that a bearish wave set is being formed. Wave 2 or b is complete, so in the near future, I expect an impulsive downward wave 3 or c to form with a significant decline in the instrument. An internal corrective wave is currently being formed, which could have already ended. I am considering short positions with targets around the level of 1.0462, which corresponds to 127.2% according to Fibonacci, and I am waiting for the end of the corrective wave.

Wave analysis for GBP/USD:

The wave pattern of the GBP/USD instrument suggests a decline. I am considering selling the instrument with targets below the 1.2039 level, because I believe that wave 3 or c will start sooner or later. However, unless wave 2 or b ends, the instrument can still rise to the level of 1.3140, which corresponds to 100.0% according to Fibonacci. A successful attempt to break through the level of 1.2877, which is equivalent to 76.4% according to Fibonacci, will indicate that the market is ready to increase the demand for the instrument. In this case, you may consider long positions.

Key principles of my analysis:

Wave structures should be simple and understandable. Complex structures are difficult to work with, and they often bring changes.

If you are not confident about the market's movement, it would be better not to enter it.

We cannot guarantee the direction of movement. Don't forget about Stop Loss orders.

Wave analysis can be combined with other types of analysis and trading strategies.