The EUR/USD pair tested the area of 1.12 yesterday but failed to consolidate below the level of 1.1300. As a result, buyers managed to organize a correction, although the bearish mood prevails for the pair as a whole.
The Fed disappointed the USD bulls. Members of the Open Market Committee held an emergency meeting yesterday but did not come up with any hawkish surprises. The meeting was behind closed doors, and as a result of the discussion, the US regulator did not make any specific decisions. On the one hand, the issue of the base interest rate was not on the agenda, but on the other hand, some analysts still assumed that the Fed would decide on a "trial" 25-point rate hike to take a similar step at the March meeting. But that did not happen.
The information created as a result of the emergency meeting put pressure on the US currency. The publication of the Reuters news agency also worsened the situation. According to journalists, there is currently no consolidated opinion among the Fed members regarding the pace of monetary policy tightening. In principle, such a conclusion "suggests itself" based on the rhetoric of some representatives of the US Central Bank.
For example, the CEO of St. Louis Federal Reserve Bank, James Bullard, showed his adherence to a hawkish course again yesterday. He reiterated that the interest rate needs to be increased by 100 basis points over the coming months until July 1. It should be noted that Bullard has the right to vote in the Committee this year, so his opinion is quite weighty in the context of the forecasts voiced. The President of the St. Louis FRB assured journalists that he would lobby the voiced course among his colleagues.
Some kind of "campaign" is needed here since not all Fed officials are ready to support such a pace of tightening monetary policy. For example, the head of the Federal Reserve Bank of San Francisco, Mary Daly, advocated a "balanced approach" in this matter. In her opinion, abrupt and aggressive actions of the regulator can have a destabilizing effect on economic growth and price stability. Moreover, she allowed the option that after the March rate hike, the Fed will pause to assess the consequences of this step, while James Bullard advocates a consistent increase in rates in March, May, and June.
Another Fed representative, Esther George, who is the head of Kansas City, also did not support the idea of a 50-point rate hike at the March meeting. According to her, the regulator needs a "systemic plan" to tighten monetary policy, but she is not sure that the Central Bank needs to start this process with an increase in the rate immediately by 0.5%. She added that the Fed should consider selling bonds from its portfolio of assets to solve the problem of high inflation. It should be noted here that George also has a vote on the Committee this year.
Meanwhile, a neutral position on this issue was voiced yesterday by the head of the FRB of Richmond, Thomas Barkin. While answering a question about a possible rate hike by 50 basis points at once, he said that he was open to such a decision, but it was necessary to consider the incoming economic data. According to him, he will closely monitor the prices of services in the coming months.
In general, none of the speakers said a categorical "no" to the 50-point rate hike in March. Rather, there were doubts about the expediency of such an aggressive step. At the same time, Fed Chairman Jerome Powell and other members of the Board of Governors did not express their position on this issue. Much will depend on the dynamics of February inflation: the corresponding report will be published before the March meeting of the Fed members.
In other words, the intrigue remains, although the voiced doubts still slightly weakened the US currency. The US dollar index left the local highs and flattened around the 96.2 mark.
However, the continuing divergence of the positions of the Fed and the ECB, as well as the nervousness around Ukraine, will not allow EUR/USD buyers to turn the tide in their favor. It can be recalled that the ECB president spoke out against "hasty decisions" regarding the interest rate. Christine Lagarde reiterated her position at the European Parliament yesterday, adding that the European Central Bank would take action "at the right time" to reach its inflation target.
So, despite the weakening of the US currency, the downward scenario of EUR/USD is still a priority. Therefore, it is advisable to use upward pullbacks for the pair to open short positions with the main target at the level of 1.1270 (the lower line of the Bollinger Bands indicator on the four-hour chart).