The EUR/USD pair continues to develop a downward trend. The bears, on its second attempt, have managed to consolidate within the 7-figure range, thanks to strong Nonfarm Payrolls data and hawkish comments from Federal Reserve Chief Jerome Powell. In addition, there is a rise in risk aversion amid recent events in the Middle East and weak data from China. The established fundamental picture has finally allowed sellers to leave the 8-figure area, within which the pair traded for almost two weeks. The next (main) target of the downward movement is located at the level of 1.0640 (the middle line of the Bollinger Bands indicator on the MN timeframe). The current information background favors the development of a downward movement. If Fed representatives do not disappoint the dollar bulls this week, the pair may "peek" into the 6-figure area in the coming days.
Several Fed members are scheduled to speak this week. In addition to Powell, who has already voiced his position, this week we can look forward to comments from Atlanta Fed President Raphael Bostic, Cleveland Fed President Loretta Mester, Council members Adriana Kugler and Michelle Bowman, Richmond Fed President Thomas Barkin, and San Francisco Fed President Mary Daly.
As mentioned earlier, the Fed chief has already shared his views, which supported the U.S. dollar. In an interview with CBS News, he reiterated that the central bank would not lower interest rates at the March meeting because "it's too early." He said that the current situation in the U.S. economy allows them not to rush with monetary policy easing. While Powell emphasized that delaying rate cuts should also be avoided (due to the risk of recession), he said that the Fed can be "prudent" in deciding when to cut its benchmark interest rate since it has time for deliberations. However, Powell did not specify any time frames. Excluding a rate cut in March, the prudent thing to do is "to just give it some time and see that the data confirm that inflation is moving down to 2% in a sustainable way," Powell said.
During the CBS News interview, Powell spoke after the release of Nonfarm Payrolls but reiterated the thesis that the central bank may act earlier if it sees weakness in the labor market or further progress on disinflation. These words are now seen in a new light due to the strong January Nonfarm Payrolls, as it suggests that the central bank will not lower rates in March (as explicitly stated) or in May (which is still in question).
The market was quick to respond: the likelihood of maintaining the status quo at the next meeting increased to 85%, while the odds of a 25-basis-point rate cut in May decreased to 51%. In other words, the market is almost completely confident in the outcomes of the March meeting, while it sees a 50/50 chance of a monetary easing in late spring. In the context of weakening dovish sentiment in the market (especially after strong U.S. labor market data), the dollar is reasonably gaining momentum, allowing EUR/USD bears to update local price lows.
The rise in risk-averse sentiment has also strengthened the positions of the EUR/USD sellers. Geopolitical tensions in the Middle East persist – the U.S. and the UK carried out another massive missile strike on Houthi targets in Yemen (a total of 36 strikes were conducted). In response, Yemeni rebels pledged to expand their military activity and threatened to retaliate for the latest attack. In other words, the situation in the region is far from de-escalation.
Meanwhile, according to experts in the insurance industry, the crisis in the Red Sea has already led to a 300% increase in shipping costs (according to Spanish credit insurance company Credito y Caucion). Commercial ships now need to choose longer and, consequently, more expensive routes to avoid the conflict zone, resulting in increased insurance costs. The recent coalition attack on Houthi targets in Yemen suggests that such a situation will persist in the foreseeable future.
News from China also contributed to rising risk-off sentiment. The Caixin China General Services PMI, after three consecutive months of growth, showed a downward trend, reaching 52.7 points in January (a 4-month high of 52.9 was recorded in December).
However, the U.S. ISM Non-Manufacturing PMI was in the "green": instead of the forecasted increase to 52.0, it reached 53.4 points in January. This is a significant growth, considering that it had decreased to 50.5 in December.
Therefore, the downward dynamics of EUR/USD have a basis. The dollar is strengthening on all fronts, primarily due to less dovish sentiment regarding the Fed's future course of actions (and secondarily due to the reinforcement of risk-off sentiment). The U.S. central bank assured the markets that the interest rate would remain unchanged in March. The possibility of a rate cut in May is also uncertain now – it's a 50/50 chance.
In such conditions of fundamental nature, it would seem both logical and reasonable for EUR/USD to fall further. The nearest target for the bearish movement is 1.0700, and the main target is 1.0640 (the middle line of the Bollinger Bands indicator on the monthly timeframe).