26.03.202414:20 Forex Analysis & Reviews: EUR/USD moves up amid weakening dollar

The EUR/USD pair continues to climb amid a general weakening of the U.S. dollar. The U.S. Dollar Index has been declining for the second consecutive day after a sharp surge at the end of last week.

Dollar bulls failed to maintain their positions, which is not surprising given the current fundamental background. The results of the March FOMC meeting do not contribute to a sustainable growth of the U.S. currency: the regulator is still preparing for the first interest rate cut and apparently has no intention of shifting the first easing date.

At the moment, the market assesses the probability of a rate cut at the June meeting at almost 70%, whereas in early March, this probability was no more than 40%, according to the CME FedWatch Tool. And most importantly, the Fed has not revised its forecasts for the extent of monetary easing. The dot plot forecast still implies a 75-basis-point rate cut within the current year.

Moreover, Fed Chair Jerome Powell essentially disregarded the latest inflation reports, which reflected an acceleration of inflation in the U.S. in February. According to him, this spike is due to seasonal factors "and does not change the confidence of the central bank leadership that inflation is gradually moving towards the target level of 2%."

Can the dollar demonstrate sustainable growth against such rhetoric? Of course not. Especially on the eve of the report on the growth of the core PCE index, which will be released on Friday, March 29th. According to forecasts, this crucial (primarily for the Fed) inflation indicator will once again demonstrate a downward trend—the seventh consecutive month. In this case, "dovish" expectations regarding further actions of the Fed will increase (in particular, the probability of a rate cut in June will rise to 75-80%), and the dollar will come under additional pressure.

All this indicates that the sharp strengthening of the greenback observed at the end of last week was initially of an adventurous nature.

It is noteworthy that this week, the dollar even ignored a resonant (even somewhat sensational) statement by the President of the Atlanta Fed, Raphael Bostic, who stated that he expects only one interest rate cut this year. According to him, inflation is decreasing slower than expected, and excessive price growth has been recorded for many goods. Bostic has voting rights this year, so his words caused a certain resonance among experts, but as we can see, the dollar did not benefit from the situation.

This is a telling moment that reflects the overall market sentiment.

It is also worth noting that EUR/USD traders are not influenced by dovish statements from ECB representatives. For example, yesterday, European Central Bank Chief Economist Philip Lane stated that wage inflation is returning to normal levels after several years of above-average growth rates. A similar position was previously voiced by ECB President Christine Lagarde.

Here's a reminder that at the end of February, the regulator released data on wages in the eurozone for the fourth quarter of last year. According to the data, harmonized wages increased by 4.5%, thereby demonstrating a downward trend (in the third quarter of 2023, growth of 4.7% was recorded). If this trend persists in the first quarter of the current year, then the ECB will "calmly" proceed with interest rate cuts following the June meeting.

Considering the corresponding hints from the Bank's representatives (including those at the March meeting), the market has partly priced in the June easing of monetary policy. Therefore, the dovish comments from ECB representatives are effectively being ignored by the market.

However, the GfK consumer sentiment index in Germany (a leading indicator analyzing future consumer spending through surveys) provided support for the euro. Although the index continues to be in negative territory, for the second consecutive month, it has shown a positive trend. With a forecast of -27.9, it came out at -27.4 points. Rising real incomes and a stable labor market create favorable conditions for improving consumer sentiment, although German consumers still lack confidence in planning and optimism about the future.

Thus, the EUR/USD pair is quite reasonably climbing after the unwarranted surge of the dollar.

From a technical standpoint, on the D1 timeframe, the price is between the middle and lower lines of the Bollinger Bands indicator but is within the Kumo cloud and below the Tenkan-sen and Kijun-sen lines. Currently, there are no technical signals for opening short or long positions. Purchases will be relevant when buyers overcome the resistance level of 1.0910 (the upper boundary of the Kumo cloud on the daily chart). In this case, the price will be between the middle and upper lines of the Bollinger Bands indicator, and the Ichimoku indicator will form a bullish "Parade of Lines" signal. The target for the upward movement will be the level of 1.1010 – the upper line of the Bollinger Bands indicator on the W1 timeframe.