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Dollar pairs, get ready. In the coming days, increased price turbulence is expected, driven by two important fundamental events. The Federal Reserve will announce its decision on June 14th, followed by the European Central Bank the next day. The significance of these events cannot be overstated, especially for the EUR/USD pair, which has essentially been stuck in a 120-point range. Over the past two weeks, the pair has traded within the range of 1.0650 - 1.0770, reflecting the indecisiveness of both bears and bulls. In other words, the spring has been compressed for two weeks, and in just a few days, it will rapidly expand. The question of whether it will favor the bulls or the bears in the EUR/USD pair remains open.
Interestingly, just a day before the announcement of the outcome of the Fed's meeting (i.e., on June 13th), the US will publish a key inflation report. This factor further complicates the challenging puzzle. On one hand, traders are practically certain that the Fed will maintain the status quo at the June meeting. On the other hand, a strong inflation report may play a role - at least in the context of tougher rhetoric in the accompanying statement, as well as Powell's statements.
According to the majority of experts surveyed by Bloomberg, the Fed will take a break in rate hikes for the first time since March 2022. Whether this will mark the end of the current tightening cycle or a temporary pause remains a point of divergence among analysts. Although most of them are confident that the Fed will verbally leave the door open for further rate hikes if inflation picks up again, there is still uncertainty. Similar to the Reserve Bank of Australia, which paused in April but then raised rates twice in May and June.
However, in the context of the Fed, traders are primarily interested in a more pressing question: whether the US central bank will raise the interest rate or truly maintain the status quo. According to the CME FedWatch Tool, the probability of a pause stands at 70%. Bloomberg economists also suggest a possible pause in June but allow for a 25-basis-point rate hike in July (with a potential rate cut of the same magnitude at the end of the year). They state that the June pause in the rate hike cycle should not be seen as a final decision.
Nevertheless, several representatives of the Fed have repeatedly emphasized the need for further tightening of monetary policy before the "blackout period" begins. Among the hawks, including Mester, Logan, Bostic, Williams, and Bullard, they believe that inflation remains significantly above the target despite the Fed's efforts to alleviate price pressures in the country's economy.
This indicates that the US May inflation report could provoke strong volatility among dollar pairs, especially if the data deviates from the forecasts.
If the report is in the "red," the chances of a pause will approach 100%. Considering the current 30% probability of a rate hike, this fact would exert considerable pressure on the greenback. Conversely, if the report pleases dollar bulls with a "green," the US dollar index may exhibit strength, rising towards the mid-104 range. Accordingly, the EUR/USD pair could test the lower limit of the 1.0650-1.0770 range or even drop towards the 1.06 level.
According to preliminary forecasts, the Consumer Price Index in May is expected to decrease sharply to 4.1% YoY (from the previous value of 4.9%). The core index, excluding food and energy prices, is also expected to demonstrate a downtrend, slowing from 5.5% in April to 5.2% YoY.
It is unlikely that the "green tint" of the inflation report will change the stance of those members of the Fed who currently advocate for maintaining the status quo. However, this fact could intensify the tone of the accompanying statement, again in the context of a potential rate hike at the July meeting.
As for the possible outcomes of the European Central Bank's June meeting, there is also intrigue. However, in this case, it pertains to the prospects of further tightening of monetary policy rather than the specific outcomes of the June meeting. Despite the slowdown in inflation in the eurozone and the technical recession (according to revised Eurostat data), the market is confident that the ECB will raise rates by 25 basis points in June.
The rhetoric of many representatives of the ECB indicates that more rate hikes are needed to reach the target 2% inflation level. This view has been voiced by many ECB members over the past two weeks, including Lagarde, Knot, Guindos, Muller, Villeroi, and Nagel. The minutes of the last May meeting also reflect this, with some ECB members advocating for a 50 basis point rate hike.
Therefore, there is no doubt that the ECB will raise rates at the June meeting. However, the outlook for future events remains uncertain, especially in light of recent macro data.
The EUR/USD pair has been in a state of suspension over the past two weeks. By the end of the next week, EUR/USD traders will likely determine the direction of further price movement. The pair will either go back to moving downward with the main target at 1.0510 (upper boundary of the Kumo cloud, coinciding with the lower line of the Bollinger Bands indicator on the weekly chart) or reverse to the upside, targeting the 0.90-1.0 level.
In such an uncertain environment and ahead of such significant events, it would be better to maintain a wait-and-see position. The EUR/USD pair will soon enter a zone of increased turbulence where the risks of false price movements are extremely high.
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