At the start of a new trading week, the EUR/USD pair is trying to develop a corrective growth. Last week the sellers failed to consolidate within the 5th figure, so they quickly lost the initiative, which was logically intercepted by the buyers. The bears have a rather difficult task: they need not only to keep their positions below 1.0600, but also to overcome the 1.0550 support level, which corresponds to the lower line of the Bollinger Bands indicator on the D1 timeframe. However, buyers also face a difficult task, the essence of which is to conquer the 7th figure. In any case, we can assume that the current price range 1.0570–1.0670 is of a "transit" nature. In a few days it will become clear whether the EUR/USD bears will be able to resume the downward trend or whether the pair will return to the area of 7–9 figures.
Powell and Nonfarm Payrolls two-day marathon
Tomorrow, March 7, U.S. Federal Reserve President Jerome Powell will begin his two-day speech in the U.S. Congress. He will first report on monetary policy to the Senate Committee on Banking, Housing, and Urban Affairs, and on Wednesday to the House Committee on Financial Services. Given the fundamental importance of this event, neither bulls nor bears in EUR/USD are likely to tempt fate by opening large positions in favor or against the greenback.
It is worth noting that the last time Powell voiced his position in public was a month ago—in early February, he participated in a discussion organized by the Economic Club of Washington. The market then interpreted his words against the greenback, as he did not tighten his rhetoric in response to the first signs of a slowdown in U.S. inflation.
However, if we evaluate Powell's February speech with an eye to recent macroeconomic releases, we see a completely different, more hawkish picture. After all, de facto, at that time, the dollar bulls were disappointed with the "final rhetoric" of the head of the Fed, who proceeded from the fact that inflation is consistently slowing down in response to the aggressive actions of the Fed in 2022. But the key inflation reports that were released during February destroyed this construction.
The consumer price index, the producer price index, the core PCE index—all these inflation indicators came out in the "green zone," reflecting trends that are unpleasant for the Fed. And this is where the remarks made by Powell in February come into play. In particular, he repeated several times the thesis that the path to the 2% inflation rate target is a rather long path, which will end only in 2024. Developing this idea, Powell said that the Fed will continue to raise the rate, "which has not yet reached an acceptable level to fight inflation." At the same time, he did not specify what level of the rate is acceptable. Given the dynamics of inflation growth, we can assume that the previous benchmark (5.1%) has lost its relevance: the level of the final rate, most likely, will be revised upwards. If Powell voices a similar outlook (which has been buzzing in the market over the past few weeks), the greenback will gain significant support. That scenario is very likely to happen.
The second significant event of the current week is the publication of key data on the U.S. labor market for February (the report will be made public on Friday, March 10). According to preliminary forecasts, unemployment in the United States should remain at the January level, that is, at around 3.4%. Meanwhile, the growth rate of non-farm payrolls should show a more modest result than in the previous month. However, we should not forget that in January, there was a half a million growth. In February, an increase of 205,000 is expected. Another point is, according to forecasts, the salary indicator should resume its growth to 4.7% in February after a decline to 4.4% in January. In this case, the trend itself will be important, in light of the acceleration of inflation in the United States.
Conclusions
Four weeks have passed since Powell's February speech. All inflation reports relesaed since then have been published in the "green zone." Many Fed officials have tightened their rhetoric, some of them (for example, John Williams) called on their colleagues to revise the level of the final rate to 5.5%. There are also bolder assumptions on the market (5.75%). With a high degree of probability, Powell will also demonstrate a fighting spirit, indicating his determination in the fight against inflation. This factor is likely to support the dollar throughout the market.
Given this disposition, it is advisable to consider short positions on the upward pullbacks for the EUR/USD pair. The nearest downward target is 1.0580 (the lower boundary of the Kumo cloud on the daily chart). The main support level is at 1.0550 (bottom line of Bollinger Bands on the same timeframe).