03.04.202414:16 Forex Analysis & Reviews: EUR/USD: Fed's hawkish signals and slowing Eurozone inflation

The EUR/USD currency pair hit a 7-week price low on Tuesday, reaching 1.0725. However, by the end of the day, bears failed to solidify below the support level of 1.0730 (the lower line of the Bollinger Bands indicator on the D1 timeframe)—traders took profits and left the lower boundaries. Nevertheless, the pair remained within the range of the 7-figure mark: buyers couldn't even test the nearest resistance level at 1.0810 (the lower boundary of the Kumo cloud, coinciding with the Tenkan-sen line on the daily chart).

The corrective pullback was rather modest, and there are significant reasons for this. Here, one might even say otherwise—given the circumstances, EUR/USD buyers were lucky to be allowed to organize a correction. This is because all fundamental factors are currently either against the euro or in favor of the U.S. dollar.

In particular, it was announced on Tuesday that orders for products manufactured in the U.S. increased by 1.4% in February, whereas most experts had forecasted a more modest growth of 1.0%. In the previous month, this indicator decreased by 3.8%.

Recall that a day before this release in the U.S., the ISM Manufacturing Index was published, which, for the first time in many months, was in the expansion zone (50.3), contrary to expectations of a modest figure of 48.5. The U.S. labor market also pleased the dollar bulls: the number of job openings increased to 8.756 million (the previous value was 8.748 million), while the market expected to see this indicator at 8.74 million.

In other words, the American labor market remains tense, and the manufacturing sector demonstrates positive dynamics, reflecting strong economic prospects for the U.S. Such fundamental conditions do not contribute to the strengthening of dovish sentiments. There is increasingly more talk in the market that the Federal Reserve may shift the date of the first interest rate cut from June to a later date—tentatively to September. The Fed representatives themselves add fuel to the fire, as they have recently been voicing rather hawkish messages.

For example, Cleveland Fed President Loretta Mester, who has a voting right this year, yesterday urged not to rush into monetary policy easing. According to her, premature (as well as too rapid) interest rate cuts without sufficient grounds (i.e., without confidence that inflation is on a stable and timely path to the target level) "risk undoing the progress the central bank has made in terms of inflation."

Just a few days before this, a similar position was voiced by Christopher Waller, a member of the Fed's Board of Governors. He also urged not to rush into interest rate cuts. In his opinion, the rate will have to be kept at its current level, probably longer than previously expected, given the stability of inflation and the high pace of employment growth in the U.S. At the same time, he emphasized that he would not support policy easing until he sees progress in slowing down inflation.

Such an information background provided support to the dollar and simultaneously put pressure on the U.S. stock market. As a result of yesterday's trading, American stock indices ended up in the red, with their decline being the highest since the beginning of last month. The yield on the 10-year Treasury remains above the 4.3% mark.

The European currency is unable to turn the situation in its favor, especially after the publication of inflation reports. According to data released yesterday, inflation in Germany reached its lowest level in almost three years. The harmonized index of consumer prices fell to 2.3% on an annual basis, the lowest level since June 2021. The downward movement was driven by energy prices, which were 2.7% lower than in the same month a year earlier.

Today, Eurozone-wide data was also published, which also did not favor the euro. It turned out that the overall consumer price index in the Eurozone fell to 2.4%. It is worth noting that until November of last year (inclusive), the overall CPI had been consistently declining, reaching 2.4%. But in December, it unexpectedly accelerated to 2.9%. Then it started slowly sliding down again: in January to 2.8%, in February to 2.6%. And in March, it decreased again, and more than forecasted—experts expected to see it at 2.5%, but as we can see, it fell to 2.4%. So, it's safe to say that a trend has formed.

The core consumer price index, excluding energy and food prices, also entered the red zone. This indicator has been actively declining for eight consecutive months now. According to forecasts, it was expected to reach 3.0% in March but eventually fell to 2.9%. This is the weakest pace of index growth since April 2022.

Thus, the established fundamental background contributes to further decline in EUR/USD. This is also indicated by the "technicals": the pair on the daily chart is between the middle and lower lines of the Bollinger Bands indicator, as well as by all lines of the Ichimoku indicator, which still demonstrates a bearish "Parade of Line" signal. The nearest target of the downward movement is the 1.0730 level (the lower line of the Bollinger Bands on D1). Overcoming this support level will open the way to the next price barrier at 1.0650, the middle line of the Bollinger Bands indicator on the MN timeframe.