The single currency tried to start a relief rally on Monday as USD bulls were seen taking some profits from the recent rally in the greenback.
US inflation remains hot
On Friday, the US Bureau of Economic Analysis stated that the Fed’s chosen measure of inflation, the Core Personal Consumption Expenses (PCE) Price Index, rose to 4.7% in January from 4.6% in December due to a 0.6% monthly increase.
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That led to a severe decline in US equities as investors have become increasingly aware the US central bank will likely not pivot anytime soon. As a result, the US dollar also strengthened notably.
Fed to hike more than currently expected?
Fed officials speaking on Friday did not advocate for a return to last year’s massive rate rises, indicating that central bankers are now satisfied to continue with a gradual tightening course despite indications that inflation is not falling as expected.
“We now believe it is a much closer call that officials hike by 50 basis points in March than our earlier 25 basis points assumption,” said Kevin Cummins, chief economist at NatWest Markets. “We put the odds at about 60% that the FOMC hikes by 50 bps.”
Investors will also keep a close eye on escalating tensions between the United States and China after Washington warned Beijing of dire repercussions if it supplied weapons to aid Russia’s invasion of Ukraine.
Before the weekend, EU member states agreed on fresh measures against Russia, including new export limits and trade prohibitions. Later in the afternoon, European Commission will release Economic Sentiment Index, Business Climate, and Consumer Sentiment Indicator numbers for February.
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In other news, market sentiment has remained fragile despite a dovish report from the People’s Bank of China (PBOC). As a result of the retreat of pandemic control measures, the central bank has pledged to boost the economy’s total spending. In addition, the central bank said that This year’s monetary policy should be precise and robust, focusing on supporting the increase of domestic demand and longer-term economic growth and price stability.
Short-term relief rally?
The following support is near 1.0520, where the lower line of the downward channel is. If not held, the euro could decline toward the critical horizontal level of 1.048. Should the pair close below these supports, the medium-term uptrend could be over.
On the upside, the target for bulls will likely be at the upper trend line of the same channel, currently near 1.065.
EUR/USD daily chart, source: author´s analysis, tradingview.com
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