01.02.202323:51 Forex Analysis & Reviews: EUR/USD. Fed and ECB: waiting for a volatility storm

The fate of the EUR/USD pair is in the hands of the Federal Reserve and the European Central Bank. Based on the results of the current week, it will become clear whether the bulls will be able to return to the idea of conquering the 10th figure, or the bears will seize the initiative, which will pull the price to the area of 7-6 figures. It would be better to make appropriate trading decisions only after members of the central banks have voiced their positions. Obviously, the Fed's rhetoric will provoke strong volatility among dollar pairs, and the EUR/USD pair will not be an exception here. But it makes sense to open positions only after Thursday's events, since the ECB can significantly "redraw" the fundamental picture.

Fed: intrigue remains

It is noteworthy that the formal results of the February meetings of the ECB and the Fed do not contain any intrigue. The market is confident that the Fed will increase the rate by 25 points, and the ECB by 50. These decisions have already been played out by the market a few weeks ago after they assessed the relevant data on inflation in the US and the eurozone. In the United States, almost all the inflation indicators are synchronously and consistently declining, while in Europe, the situation is somewhat different: the harmonized consumer price index is slowing down, while the core index (excluding food and energy prices) continues to show an uptrend, updating more and more records. This is an important thing to consider, which will certainly affect the degree of hawkishness of the members of the ECB. The Fed, in turn, can calmly slow down the pace of rate hikes to a 25-point pace.

But, I repeat, traders have already considered the central banks' decisions for this month. Market participants are interested in the central banks' next steps. According to the dovish scenario, the Fed will revise the final level of the rate downward (now the upper bar is at around 5.1%). If the Fed questions the rate hike at the March meeting, the dollar will collapse across the market, as Fed officials voiced conflicting stances on the issue. For example, James Bullard (who, however, is deprived of the right to vote in 2023) called for a rate hike to 5.50%, which is above the declared target.

Therefore, if Fed Chairman Jerome Powell announces that the next hike will depend on the dynamics of key macro indicators (primarily in the field of inflation), bulls will be able to organize a serious attack, rising to at least 1.0950-1.0970 (and possibly , and to the limits of the 10th level).

If Powell remains firm and says the Bank will stick with its previous goals, the dollar bulls can take the chance to pull the price into the area of the 7th figure. This is a conditionally hawkish scenario, the probability of which is on a par with the conditionally dove.

An ultra-soft scenario in which Powell allows a rate cut in the second half of the year is extremely unlikely.

ECB: Does the market have high expectations?

Representatives of the ECB and above all ECB President Christine Lagarde, have voiced quite a hawkish stance over the past few weeks. As a result, the probability of raising rates by 50 points has now actually reached 100%. But the strengthening of the "hawk wing" of the ECB can play a cruel joke on the euro, as market expectations are clearly overstated. The implementation of the 50-point scenario in February is already taken into account in current prices, while the development of the uptrend requires more information that will serve as a boost. We are talking about the prospects of increasing the rate by 50 points at the next, March meeting.

In my opinion, the central bank will continue to act in line with the hawkish course, having previously agreed to maintain a 50-point pace of rate hikes in the context of the March, and possibly May meeting. These assumptions are based on the rhetoric of many ECB members who voiced their position during January ( Lagarde, Martins Kazaks, Klaas Knot, Isabelle Schnabel, Robert Holtzman, Olli Rehn, Francois Villeroi de Galo).

In particular, Knot recently mentioned that he sees no reason to slow down the pace of rate hikes until mid-2023. In his opinion, the ECB is late in tightening policy and is only half way through the current cycle of monetary tightening. If the rhetoric of the accompanying statement and Lagarde himself is sustained in the same way, the euro will receive strong support throughout the market.

Conclusions

Preliminary (most likely) scenarios imply stronger bullish sentiment on the pair. In this case, there is a prospect of hitting the 10th figure and further growth to the resistance level of 1.1080 (the upper line of the indicator Bollinger Bands on the daily chart). However, it is risky to open long positions for the pair right now (as well as to enter the shorts) because we're not entirely sure that both Lagarde and Powell will play according to our expectations. They can suddenly come up with some unexpected rhetoric (i.e. Powell can be hawkish and firm, or Lagarde may question the 50-point hike in March). Therefore, until Lagarde's press conference is over, it would be better to stay out of the market, given the significance of the coming events.