The euro-dollar pair tested the 9th figure at the start of the new trading week for the first time since April last year. Such price dynamics is due not only to the weakening of the U.S. currency (the U.S. dollar index opened trading with a downward gap), but also to the strengthening of the euro (as evidenced by the main cross-pairs involving euro). Such a fundamental background allows EUR/USD bulls to move towards the upper line of the Bollinger Bands indicator on the D1 timeframe, which currently corresponds to the 1.0950 mark. Overcoming this resistance level will open the way for traders to the 10th figure.
Dollar in disgrace
The U.S. dollar is declining amid an almost empty economic calendar on Monday, following Friday's trading inertia. The U.S. dollar index fell from 102.30 to 101.70 on the last day of last trading week. The weekend didn't change traders' minds: today, the index resumed its downward marathon, heading to the base of the 101st figure. Major currency pairs changed their configuration accordingly, with the exception of USD/JPY, which rose after the publication of the minutes of the Bank of Japan's December meeting (according to some members of the Governing Council, the central bank should "clearly explain that expanding the yield range is not the first step in exiting the ultra-loose policy").
But in general, the greenback is under significant pressure. Recent releases indicate that the Fed is guaranteed to reduce the pace of rate hikes to 25 points, and will do so at its February meeting. On Friday, Fed Governor Christopher Waller (who has long been one of the main hawks in favor of an aggressive rate hike) advocated a 25-point scenario. Earlier, a similar position was voiced by other representatives of the Fed, in particular, Patrick Harker, Lorie Logan, and Esther George.
Such statements were made amid a slowdown in U.S. inflation indicators: note that not only the consumer price index, but also the producer price index came out in the red zone. If this week, core PCE index comes out at least at the predicted level (not to mention the "red color"), the puzzle will be finalized. However, the market already de facto has no doubt that the Fed will reduce the pace of rate hike to 25 points. According to the CME FedWatch Tool, the probability of this scenario at the February meeting is estimated at 99%. I think additional comments are unnecessary here.
Euro outlook
Unlike the dollar, the euro enjoys support from the ECB. Representatives of the central bank are vying to voice hawkish messages, assuring traders that the regulator will not change its hawkish course. Last week, there were rumors in the market that the European Central Bank may reduce the rate hike to 25 points in March. The relevant information was published by Bloomberg, citing its sources in the central bank.
The published insider, to put it mildly, surprised market participants (it was then that the EUR/USD pair updated the local high, dropping to 1.0795) since many ECB members voiced opposite signals in public. Christine Lagarde came to the aid of the euro here: speaking at the Davos economic Forum, she said that the European Central Bank is still far from its target, and the regulator has to take "several significant steps." The hawkish minutes of the ECB's December meeting only complemented her words, keeping the EUR/USD pair within the 8th figure.
Today the "hawkish marathon" got its development. Firstly, ECB Governing Council member and Bank of Finland Governor Olli Rehn said that he sees all grounds for a significant interest rate hike "both in winter and this coming spring." Second, a Reuters poll of leading economists was released today. According to most experts, the European Central Bank will raise rates by 50 points, not only at the February meeting, but also at the March meeting. The polled economists also predicted that the rate will reach 3.25% by the middle of the year (the highest value since end 2008).
Conclusions
The fundamental background formed last week contributes to further growth in the price of EUR/USD. And to date, the situation has not changed: the comments of the head of the central bank of Finland, as well as the published Reuters survey, only added to the fundamental picture, allowing buyers of the pair to test the borders of the 9th figure.
Today's main news flow is expected during the U.S. trading session. Eurozone consumer confidence index will be released (positive dynamics is expected), and ECB representatives Christine Lagarde and Fabio Panetta will give a speech (they can also support the euro). In general, the pair remains bullish. The price echelon has shifted one step up, to the range of 1.0850–1.0950. Probably, in the medium term, EUR/USD buyers will try not only to gain a foothold within the 9th figure, but also to precipitate the 1.0950 resistance level, which corresponds to the upper line of the Bollinger Bands indicator on the daily chart.