12.03.202417:04 Forex Analysis & Reviews: Dollar is saved: Is the worst over?

The release of inflation data in the USA for February, at first glance, appeared to be good news for the bears on EUR/USD. Consumer prices rose by 3.2% and core inflation by 3.8% year-on-year, surpassing Bloomberg experts' forecasts of 3.1% and 3.7%, respectively. In the monthly calculation, the CPI matched the consensus estimate of 0.4%, while the core indicator exceeded it. The acceleration of inflation in the services sector to 0.8% month-on-month raised concerns. It seemed that its dynamics allowed the Federal Reserve not to rush with interest rate cuts. However, reality may be different.

After the release of February consumer price statistics, the chances of a May start to monetary expansion fell from over 20% to 13%, and for June, from 72% to 68%. Treasury bond yields declined, futures on U.S. stocks fell, and EUR/USD quotes returned to 1.09. However, traders quickly reassessed the situation. The main currency pair returned to the levels from which it started the trading day. If the Federal Reserve Chairman says that the moment of rate cuts is near and the central bank needs more data similar to the previous ones, why not sell the U.S. dollar?

Dynamics of American inflation

In fact, the actual inflation figures turned out to be very close to the forecasts. This circumstance is unlikely to lead to serious shifts in the Fed's worldview. The Federal Open Market Committee (FOMC) is likely to maintain its forecasts for the federal funds rate next week despite the strength of the U.S. economy. This includes three acts of monetary expansion in 2024, as expected by financial markets. If this scenario unfolds, bulls on EUR/USD will have a new reason to attack.

On the contrary, ING believes that U.S. dollar positions are strong in the short term. However, in the medium-term investment horizon, the euro will take revenge. The main currency pair has approached the upper boundary of the consolidation range 1.05–1.1 but appears overbought in terms of the yield differential between U.S. and German bonds. Risks of EUR/USD falling to the range of 1.085–1.900 are growing. Nevertheless, the subsequent recovery of the global economy will have a favorable impact on the euro as a pro-cyclical currency.

The inflation statistics for February may have saved the bears on EUR/USD from defeat. If the actual figures for the indicators were lower, the main currency pair could have stormed the resistance at 1.1 and consolidated above this level. For now, buyers will have to postpone their ambitious plans for better times.

Technically, on the daily chart of EUR/USD, the bears are making a second attempt to play out the pin bar. The first one did not yield results, but sometimes it needs time. If the main currency pair closes the trading day above 1.0915, the risks of its decline to the fair value at 1.084 will increase, especially if the support in the form of the pivot level at 1.09 does not hold.