04.03.202612:57 Forex Analysis & Reviews: EUR/USD. Williams's dovish signals, accelerating CPI in euro area, and Middle East escalation

The euro/dollar pair extended to a multi-month low yesterday, hitting 1.1530, the weakest price since 25 November last year. Sellers stood only forty pips from the powerful support at 1.1490, which corresponds to the lower line of the Bollinger Bands on the W1 timeframe. Yet, as the pair approached the 1.15 area, traders began taking profits and thus negated the southward impulse. As a result, yesterday's session closed inside the 1.16 area, at 1.1612.

Looking ahead, it should be noted that long positions look risky and vulnerable in the current circumstances. Geopolitical risks have not abated; they have intensified significantly in view of recent statements by officials from the United States, Israel, and Iran.

Nevertheless, the fact remains: buyers organized a corrective pullback for the first time since the Middle East storm began. What caused it?

In my view, a combination of two fundamental factors was at work: the dollar came under pressure from unexpectedly dovish rhetoric by New York Fed president John Williams, while the euro received support from an inflation report that showed an acceleration of CPI in the euro area.

Start with Williams, who surprised markets with his tone. Despite acceleration in PPI and the core PCE index and despite a stronger oil market, he effectively left the door open for future easing of monetary policy, saying that further cuts to the federal funds rate will be warranted over time. In his words, the Fed should avoid a situation in which monetary policy becomes unintentionally too restrictive as inflation decelerates. He made clear, however, that the Fed is not prepared to react to tariff inflation. Although Williams acknowledged that tariff increases had added 0.5–0.75 percentage points to inflation, he characterized that effect as "one-off," noting the absence of clear secondary effects (in particular, wage growth following prices) and no major disruptions in supply chains.

Against this backdrop, the New York Fed chief expressed concern about the state of the US labor market, saying it is in a period of low activity (few hires, few layoffs). He argued that the situation points to hidden risks of cooling in the economy.

The balance of his rhetoric signals that the Fed is currently more worried about supporting employment than about fighting inflation.

Moreover, contrary to many analysts' expectations, John Williams assessed the impact of the Middle East conflict on the US economy relatively cautiously. He said US dependence on oil imports is far lower than historical norms, thanks to the shale revolution, and that oil price swings are unlikely to fundamentally alter the economic trajectory.

It should be noted that John Williams is one of the most influential Fed officials and, in addition, holds a permanent vote on the Committee, so markets react to his comments almost as strongly as to remarks from Jerome Powell.

The euro, in turn, reacted positively to February inflation data for the euro area. Headline CPI accelerated in February to 1.9% year-on-year, up from 1.7% the previous month, while core CPI rose to 2.4%, defying forecasts that it would stagnate at 2.2%. All components of the report are printed in the "green zone.

A separate point is services inflation, which accelerated from 3.2% to 3.4%. For the ECB, this is a significant and worrying signal because core services inflation is harder to cool quickly than other categories. Therefore, upward momentum in this indicator is a strong argument for the regulator to maintain a wait-and-see stance.

All of these fundamental factors helped buyers organize a short-term correction in EUR/USD. But long positions remain risky and unreliable because the flywheel of escalation in the Middle East continues to accelerate, increasing uncertainty.

Israel continues to strike Tehran and other Iranian cities and targets, simultaneously saying any new Iranian leader would be a legitimate target for destruction. That negates any prospects for a diplomatic pause, at least in the foreseeable future.

Hezbollah, for its part, has begun large-scale attacks on Israeli territory using ballistic missiles. In response, the IDF has redeployed additional forces to southern Lebanon, which in effect signals the start of an expanded ground operation.

On top of that, Iranian officials have declared full control of the Strait of Hormuz and announced a complete halt to navigation. President Donald Trump said the US Navy stands ready to escort tankers (a move that could potentially lead to direct naval confrontations). Iran continues to strike US military bases and oil infrastructure targets in the region with attack drones.

In other words, there are no signs of de-escalation, and none are expected, which means risk-off sentiment will continue to dominate the market and support the US dollar. Accordingly, corrective northward retracements in EUR/USD are best used to open short positions with targets at 1.1600 and 1.1550 (the lower line of the Bollinger Bands on the H4 chart).