29.01.202317:03 Forex Analysis & Reviews: EUR/USD. Preview of the week. Hot days of February

The EUR/USD has been showing a pronounced uptrend since October 2022. It rose more than a thousand pips in just a few months, going up from 0.97. But if we look at the weekly chart, we can see that the upward momentum in the second half of January has actually stopped. Traders are getting weaker: bulls refuse to conquer the 9th figure, bears are afraid to go down to the base of the 8th price level.

Last week's trades vividly illustrate the situation: opening price at 1.0869, and the closing price at 1.0870. The pair made a circular movement and finished the week at the opening level. Obviously, market participants are eagerly anticipating the forthcoming week's high-profile events. In early February, the Federal Reserve and the European Central Bank will hold their first meetings in 2023, the results of which will surely cause the increased volatility of all the dollar pairs, and EUR/USD will not be an exception here.

ECB

On the one hand, there is no intrigue regarding the outcome of the ECB's February meeting: the preceding stance suggests that the central bank is guaranteed to raise interest rates by 50 basis points. But on the other hand, the February meeting is likely to have a strong impact on the pair. The fact is that further prospects of monetary tightening are the subject of lively discussion.

In mid-January, an insider told Bloomberg that the central bank will reduce the rate hike to 25 points starting from the March meeting. Some ECB members, including the head of the central bank of Greece, supported the idea (Yannis Stournaras called for a "more gradual" rate hike). However, most members of the ECB took a more hawkish stance, albeit without any specifics regarding further meetings (after February). As a result, a logical question emerged: can the hawkish attitude of the ECB be projected to the March meeting or is it limited exclusively to the February result? By the way, the latest eurozone inflation data can also be interpreted in two ways: the overall consumer price index continued to slow down, while the core CPI, to the surprise of most experts, rose again, reaching 5.2% (another historical record for the eurozone).

All this suggests that the outcome of the February meeting is not predetermined. Yes, the central bank is likely to raise rates by 50 points (this fact has already been factored into prices), but the final communique may have surprises - and not necessarily in favor of the euro. Hawkish expectations regarding the ECB's actions are, in my opinion, somewhat exaggerated, so any doubts regarding the preservation of the 50-point rate hike will be interpreted against the single currency.

The Fed

The CME FedWatch tool showed a 98.4% probability of a rate hike of 25 basis points in February. In this case, there is also no intrigue, given the corresponding verbal signals from the Fed representatives. As in the case of the ECB, traders are interested in future perspectives.

Going back to the CME FedWatch tool, the probability of another 25-point rise in March is estimated at 84.2%. While the probability of keeping the rate at the February level is 15.5%. And this is quite a lot, considering the fact that the U.S. economy surprised investors with more significant growth in Q4 relative to expectations of most experts.

Traders expect answers to several important questions from the Fed:

1) Can the Fed prematurely end the current cycle of monetary tightening by revising down the level of the final rate (as of today, the central bank is focused on 5.1%)?

2) Do Fed members allow for a rate cut in the second half of the year if inflation continues to slow and other macroeconomic indicators show a negative trend?

It is worth noting that while a rate cut in 2023 is an extremely unlikely scenario, an early pause is quite viable.

Do recall that the February meeting will be the first of this year. Every year a portion of the voting members of the FOMC rotate. In 2023, two clear hawks - James Bullard and Loretta Mester - lost their right to vote. They were joined by Esther George (she has also been making very hawkish statements lately) and Susan Collins (a centrist). Also eligible to vote were Austen Goolsbee (the new head of the Fed of Chicago, who took over from Charles Evans, is considered a dove), Patrick Harker (voted for a 25 point hike in February), Lorie Logan (also in favor of slowing down the rate hikes) and Neel Kashkari (who has been voicing hawkish cues lately). We don't know how the tone of the accompanying statement rhetoric will change, given the rotation.

Conclusions

In my opinion, the Fed will raise the rate by 25 bps and the ECB by 50 bps, but the likely outcome of the March meetings will still be in limbo. The US central bank will probably not categorically rule out a pause, indicating that further decisions will be based on incoming data. Such a result will definitely be interpreted against the greenback, with all the consequences that follow. But that is just one of the possible outcomes: the intrigue about the outcome of the February meeting persists, and will only be resolved at the "X" hour (Wednesday, February 1).

Since traders are being cautious, we can assume that EUR/USD will trade in the 1.0850-1.0950 range in the coming days, while further price fluctuations will depend on the outcome of the Fed and ECB meetings.