Traders of the EUR/USD pair cannot determine the direction of price movement. The pair circles the 1.0700 level, regularly diving into the 6th figure area. However, as soon as the price drops to 1.0650–1.0670, EUR/USD bears close their short positions, extinguishing the southern impulse. Similarly, buyers behave by closing their long positions when approaching the 8th figure.
The pair has been trapped in a wide-range flat as buyers and sellers hesitate to move away from the 1.0700 level by more than 50–60 points. Such indecisiveness is associated with the upcoming Federal Reserve meeting, the results of which we will learn next Wednesday, June 14. The market has no consensus regarding the prospects of tightening the Fed's monetary policy. There is also no unified position among members of the American regulator - before the onset of the "quiet period," some central bank representatives advocated for rate hikes. Furthermore, it should not be forgotten that the European Central Bank will hold its meeting on June 15, and its members have noticeably tightened their rhetoric despite the slowdown in inflation in the Eurozone. In the face of such uncertainty, EUR/USD traders are reluctant to open large positions in either direction.
Interestingly, according to the CME FedWatch Tool, the probability of a 25-point rate hike at the June meeting is only 23% (the probability of maintaining the status quo is 77%). Such preliminary forecasts should work against the American currency and, consequently, in favor of EUR/USD buyers. But traders are not rushing to conclusions: the U.S. dollar index is drifting at the 103–104 figure boundary, demonstrating oscillatory movements and reflecting the indecisive position of market participants. The essence of what is happening is quite simple: the possibility of a "hawkish surprise" is not ruled out, and given the overall market sentiment, an unexpected 25-point rate hike will have the effect of an exploded bomb.
Here it is necessary to remind once again that members of the Federal Reserve voiced contradictory rhetoric before the onset of the "quiet period." In particular, Jerome Powell effectively announced a pause in May, stating that banking stress "weakened the need for an interest rate hike." Philadelphia Fed President Patrick Harker and Federal Reserve Board member Philip Jefferson "directly" said they would oppose a rate hike at the June meeting. In turn, Minneapolis Fed President Neel Kashkari did not rule out any options. According to him, the June meeting of the Federal Reserve will decide whether to raise the rate or pause it.
At the same time, hawkish signals were also heard. For example, Cleveland Fed President Loretta Mester stated that there are no convincing reasons for a pause in rate hikes. Dallas Fed President Robert Kaplan supported his colleague, noting that incoming data "support a rate hike at the next meeting." Thomas Barkin, Raphael Bostic, and John Williams voiced doubts about a possible pause.
Representatives of the "hawkish camp" point to inflation, which continues to demonstrate stubbornness. First and foremost, members of the American regulator were alerted by the core PCE index, which entered the "green zone" at the end of May. From September to December last year, this key inflation indicator consistently declined (from 5.2% to 4.6%). Then, in January and February, it reached 4.7%; in March, it returned to the December level of 4.6%. However, in April, the index again stood at 4.7%, despite the forecast to decline to 4.5%.
Other inflation indicators also do not contribute to the "dovish sentiment." For example, the monthly Consumer Price Index (CPI) reached 0.4% after a 0.1% increase. The result coincided with the forecasts of most experts. In annual terms, the overall CPI, with a forecasted growth of 5.0%, stood at 4.9%. On the one hand, this is the slowest pace of growth since April 2021, but on the other hand, the indicator is still far from the target level. The core CPI, excluding food and energy prices, showed a slight increase of 0.4% monthly and a slight decline of 5.5% annually.
Conclusions
It is indeed impossible to rule out the hawkish scenario. Judging by the dynamics of the EUR/USD pair, traders are not ruling it out either, as they refrain from opening large positions in favor of or against the greenback.
It is likely that the pair will not be able to break free from the wide-range flat trap until June 14, when the Federal Reserve announces its verdict. Therefore, when approaching the levels of 1.0650–1.0760, it is better to exercise caution and close the corresponding trading positions.