The dollar is actively declining ahead of the Federal Reserve meeting, which is set to begin today. Yesterday, its DXY index tested the 103.00 level, and today, it broke through it again, dropping to the 102.78 mark (as of writing, it was near the 102.85 level).
Dollar buyers are not risking opening new long positions, considering market expectations and economists' forecasts that the Fed leaders will not make changes to the parameters of the current monetary policy during the June meeting, maintaining the interest rate at 5.25%. Moreover, the dollar's weakening may accelerate if Fed officials express a preference for a wait-and-see approach. Many economists believe that by the end of the year, the Fed may even shift towards a more accommodative policy.
In this regard, market participants' attention today will focus on the release of fresh U.S. inflation data at 12:30 (GMT), which can significantly influence market expectations regarding the prospects of Fed monetary policy and the dynamics of the dollar.
Another slowdown in annual inflation in the United States is expected. According to the forecast, the year-on-year CPI decreased to 4.1% in May from 4.9% in April, and the core CPI (excluding food and energy) fell to 5.3% from 5.5% in April.
This is worse than last week's preliminary forecast of +0.4% (+4.5% on an annual basis) for CPI and +0.4% (+5.6% on an annual basis) for core CPI.
The significant deceleration in the pace of annual inflation in the United States indicates the success of the actions taken by the Fed in its fight against inflation. The trend towards further slowdown is evident, and the leaders of the U.S. central bank have grounds to pause the cycle of tightening monetary policy. This is a bearish factor for the dollar, considering that other major central banks in the world have recently raised their interest rates and expressed readiness for further increases. This applies, in particular, to the central banks of Canada, Australia, and the eurozone, whose meeting is scheduled this Thursday. Another rate hike by the ECB is expected, which will not have a positive impact on the dynamics of the DXY, considering that the euro accounts for more than 50% of the dollar index.
It is worth noting that the Fed's decision on the interest rate will be announced on Wednesday at 18:00, and the ECB's decision will be released on Thursday at 12:15 (GMT).
From a technical point of view, EUR/USD is attempting to break through the zone of important resistance levels at 1.0800 (200 EMA on the 4-hour chart) and 1.0810 (50 EMA on the daily chart) to resume its upward movement within the medium-term bullish market. However, for a breakthrough into the zone of the long-term bullish market, the pair needs to break through key resistance levels at 1.0950 (144 EMA on the weekly chart) and 1.1070 (200 EMA on the weekly chart).
In an alternative scenario, EUR/USD will break the key support level at 1.0690 (200 EMA on the daily chart) and move towards the local support level at 1.0520. Its breakthrough will definitively return EUR/USD to the zone of the global bearish market.
Support levels: 1.0775, 1.0744, 1.0720, 1.0700, 1.0690, 1.0600, 1.0520, 1.0500
Resistance levels: 1.0800, 1.0810, 1.0900, 1.0950, 1.1000, 1.1070, 1.1100