How many times have we told the world, "Don't go against the Fed!" When the market refuses to accept reality, it will be severely punished. And happiness was so close! Investors easily passed the test of the FOMC meeting, stock markets and the EURUSD pair were ready to continue the rally, but the US employment data turned everything upside down. If the economy picks up again, the return of the factor of American exceptionalism to the game will pull the US dollar out of the abyss. The process seems to have already started.
Despite the fact that the Federal Reserve has repeatedly mentioned since December that it is not going to lower rates in 2023, the markets have left this scenario with a 3% chance. The speeches made by Fed Chairman Jerome Powell and his colleagues were seen as nothing more than empty gibberish. They say if monetary policy depends on the data, the central bank is not going anywhere - it will be forced to loosen monetary policy when the recession finally materializes. The problem is that the data could go in a completely different direction. Employment will rise by 517,000 and inflation will accelerate to 0.5% m/m. And there's no need to nod to its annual slowdown. Due to the high base effect, CPI will still be down in 2023.
The markets are looking at the Fed and trying to gauge its next moves with macro data. Investors have completely forgotten about the European Central Bank, the hawkish speeches of its members and the European economy itself. Speaking of, according to the European Commission, in 2023, the European economy will look better than expected. The forecast was raised from 0.3% to 0.9%. Inflation estimate was lowered from 6.1% to 5.6%.
Dynamics of the eurozone economy
The January EURUSD rally was driven by the factor of reduced divergence in economic growth and monetary policy. The eurozone economy continues to be happy, while the U.S. is rolling into recession. The Fed will soon pause in raising rates, while the ECB is set to raise rates by 150 bps. But the situation radically changed at the beginning of the second week of February. Not in Europe but in the United States. And so the dollar strengthens against the world's major currencies.
What's next? Markets are ruled by people, and people tend to react emotionally to fresh news. Once they realize that the Federal Funds rate will not go any higher than 5.25% and the U.S. economy is unlikely to seriously accelerate, they will lose interest in selling EURUSD again. The question is, when exactly will that happen?
It is quite possible that it could be right after the U.S. inflation data for January. CPI growth of 0.5% m/m will allow profit taking on short positions in the main currency pair. When everyone is selling, there is a great opportunity to buy.
Technically, on the EURUSD daily chart, there is a rebound in the 20-80 bar. As a rule, the growth is perceived as a short-term correction, so a rebound from the important levels of 1.0695, 1.0715 and 1.0745 will create a reason for selling. Failure to return to the limits of the fair value range and taking the moving averages will be a sign of the bulls' weakness and will increase the risks of plunging to 1.0586-1.0615.