Should there be no new information, can we anticipate a substantial reaction? The market is awaiting statements from Jerome Powell, with expectations that the Fed won't hastily implement monetary policy easing. Forecasts from the ECB regarding inflation swiftly approaching the target, coupled with caution, are also anticipated. The likelihood of the European Central Bank cutting rates in March or April is highly uncertain. The only potential source of surprise capable of significantly impacting the EUR/USD dynamics lies in the February data on the U.S. labor market.
When awaiting major events, the impact may not be as significant. Fiscal stimulus from Chancellor Jeremy Hunt extended a helping hand not only to the pound but also to the euro. According to recent Ipsos polls, only 20% of respondents support the ruling Conservative Party, with 47% of voters ready to vote for the Labour Party in the parliamentary elections. The government needs to take action, and it decided to cut taxes.
Fiscal stimulus accelerate economic growth but simultaneously fuel inflation. According to Hunt, consumer prices in the UK will return to the 2% target within a few months. The problem is that they will escalate again after some time. Clearly, the best solution for the Bank of England is to keep the repo rate at the current 5.25% for an extended period. This stance supports the pound. Meanwhile, expectations of GDP growth in the UK are favorable for the currency of its main trading partner, the Eurozone.
Inflation dynamics in the eurozone
A similar puzzle stands before the ECB. Inflation in the currency bloc is rapidly approaching the target, but service prices are stuck near the 4% mark, risking acceleration amid high wage growth rates. As a result, the risks of a political mistake in the form of premature deposit rate cuts are growing. The central bank is forced to be cautious.
Can the euro ride high on someone else's back? Grow in response to fiscal stimulus in the UK? I don't think the EUR/USD rally will last long. The balance of power in the main currency pair will depend more on the statistics on U.S. non-farm payrolls for February than on Powell's testimony before the U.S. Congress and the ECB meeting.
In essence, the trajectory of inflation and the Federal Reserve's monetary policy hinges on the state of the labor market. Should non-farm payrolls persistently exceed expectations and average wages maintain a growth rate of 4% or higher, it will inject fresh momentum into service inflation. This, in turn, diminishes the probability of monetary policy easing in June and reinforces the position of the U.S. dollar.
Technically, on the daily chart of EUR/USD, the price approached the pivot level at 1.0885 within arm's reach. A successful assault will be a reason for buying towards 1.094, assuming resistance at 1.0905 doesn't hold. Conversely, the pair's return to the fair value range of 1.076–1.085 is a sign of bulls' weakness and a basis for selling.