28.01.202600:38 Forex-elemzések és áttekintések: EUR/USD. January Fed Meeting: Preview

The formal outcomes of the January Fed meeting, to be announced on Wednesday (January 28), are predetermined: the central bank will almost certainly maintain all monetary policy parameters in their current state. The probability of this scenario is 97%, according to CME FedWatch data. This means the market has no doubt that the Fed will keep interest rates at the current level and will likely ignore any confirmation of this assumption.

However, further actions from the Fed remain a subject of debate. Among traders, hawkish sentiments clearly prevail. For example, the probability of a rate cut at the March meeting is only 14%, and 25% at the April meeting. The chances of a June rate cut are estimated at 50/50.

In other words, market participants are almost certain that the Fed will maintain a wait-and-see position throughout the first half of the year.

In my opinion, this is a rather bold assumption considering the current situation in the US labor market. Apparently, most market participants believe that Fed members are focusing on inflation risks while downplaying employment issues. This confidence is based on relatively decent (or rather, not catastrophic) Non-Farm Payrolls data, as well as on CPI, PPI, and PCE reports, which showed consumer price growth stagnating alongside an acceleration in the producer price index and the core personal consumption expenditure index.

There is logic in this, but there are a few "buts."

In my opinion, the "green tint" of the December Non-Farm Payrolls lulled market vigilance. The headline figure indeed turned out better than expected, but the report's structure raises more questions than it answers. Firstly, a 55,000 increase in non-farm employment appears to be a weak result. For the American economy, any figure below 70-80,000 indicates a slowdown in the labor market.

The second factor is the change in the quality of employment. The primary increase in jobs in December came from the public sector, healthcare, and education—i.e., sectors with low cyclicality and weak interest-rate sensitivity. Meanwhile, the private sector demonstrated weak dynamics (especially interest-sensitive sectors such as real estate, finance, and automotive). This indicates that the economy has stopped generating "healthy" jobs independently (without financial support, so to speak).

Another troubling signal for the Fed in the context of the December Non-Farm Payrolls is wages. Year-on-year wage growth has slowed, while it is precisely wages that the Fed considers a key channel for sustained inflationary pressure. If the labor market were "heating up," we would see an acceleration in wage growth. Instead, we observe the opposite trend.

Can we speak of a sustainable recovery in the American labor market under such "initial data"? This question is far from rhetorical, as they say.

Now, let's talk about inflation. Reports on US inflation growth are also quite ambiguous. For instance, the December CPI increase was mainly driven by components with low sensitivity to the Fed's monetary policy (housing, specific services, medical expenses). The most volatile components of the CPI—energy and food—showed moderate growth. Overall, the December result indicates that market fears of a spiral acceleration in inflation are not materializing, at least for now.

Regarding the PPI, the structure of the November report (December data will be published in February) indicates that inflationary pressure is predominantly persisting in the services sector, while price dynamics in goods remain quite restrained: the rise is more of an inertial nature and primarily linked to costs and wages rather than demand overheating. Additionally, the limited dynamics of trade markups reduce the likelihood of "transmitting" price pressure to the consumer level, i.e., translating the growth of PPI into CPI. Since there are no clear and distinct prerequisites for accelerating consumer inflation, this report cannot be considered categorically "hawkish."

Finally, the core PCE index accelerated to 2.8% year-on-year in November. On one hand, one of the key inflation indicators indeed rose after two months of decline. On the other hand, this fact does not necessarily lead to a tightening of the Fed's rhetoric at the January meeting. The Fed usually reacts not to a one-time deviation but to the medium-term trend in inflation, whereas, in previous months, the core PCE index showed a downward trend.

All of this suggests that the Fed will most likely keep the interest rate unchanged at the January meeting while adopting a more dovish stance regarding future prospects. For instance, the central bank may subtly "highlight" employment risks while downplaying inflation risks. Traders will perceive such a scenario as "dovish," given the general expectations of most market participants.

In other words, in my opinion, the Fed will allow for a rate cut at one of the upcoming meetings (in March or April), thereby exerting additional pressure on the American currency. This outcome would support buyers of the EUR/USD pair, increasing the likelihood of testing the 1.2000 level. The technical picture also favors long positions, as the pair is located above all lines of the Ichimoku indicator (including above the Kumo cloud) and on the upper line (or between the middle and upper lines) of the Bollinger Bands indicator on the H4, D1, W1, and MN timeframes.