The EUR/USD pair gave a muted response to the report on inflation growth in the US published yesterday. At first, the US dollar strengthened its position and then sank across the board. At the end of yesterday's New York session, it again tried to show its character. Importantly, all price movements for the EUR/USD pair occurred at the levels above 1.09. Despite the stronger-than-expected CPIs, the sellers were not even able to test the levels above 1.08. This is indeed a significant point, given that headline inflation accelerated in February - both in monthly and annual terms.
Why did traders react so indifferently to such a significant macroeconomic report? In my opinion, it's all about market expectations, which did not actually change from yesterday. Thus, according to the CME FedWatch Tool, the probability of maintaining the status quo at the March meeting is now 99% and at the May meeting is 88%. In other words, the market is confident that the Federal Reserve will not lower the interest rate at the next two meetings. This confidence was evident even before yesterday's release. At the same time, market participants still estimate the probability of a rate cut in June as 50/50. To be more precise, the probability of monetary policy easing at the June meeting is 59%.
That is, the June prospects are still relevant, and the green color of the February CPI in this context has not changed anything.
So, it turns out that the consumer price index only confirmed market expectations for March and May (which were already taken into account in market quotes). The inflation report did not dispel traders' hopes that the Federal Reserve will refuse to cut the funds rate in June. Hence, the market gave a lukewarm response. Plus, there is an actual decrease in the core consumer price index. The inflationary pressure eased to a lesser degree in February, but the downward trend remained. In annual terms, the core CPI was at 3.8%. This is the lowest growth rate since June 2021. In addition, prices for basic services excluding housing (the so-called super core CPI) rose by 0.47% in February from an increase of 0.85% in January. Also, do not forget that the core PCE index has been demonstrating consistent downward dynamics for the 6th month in a row. The rate of wage growth, according to the latest nonfarm payrolls, has slowed down.
For these reasons, the US dollar did not receive proper support. Accordingly, EUR/USD bears also lacked support. The only achievement of the sellers is the price withdrawal from 1.10. There is no doubt that if the report had come out in the red zone, EUR/USD would have already tested the resistance level of 1.1050 designated by the upper border of the Bollinger Bands on the weekly chart.
There are other reasons why the US dollar was not in great demand yesterday. Among them is a growing risk appetite. The US stock market closed in the green yesterday amid a rally in the technology, industrial, and consumer services stocks. The Dow Jones index rose by 0.61%, the NASDAQ Composite index rose jumped by 1.54%, and the S&P 500 gained 1.12%.
The complexity of the situation also lies in the fact that the so-called "silence regime" is now in effect. Fed policymakers refrain from any public comments during 10 days in the run-up to the Federal Reserve meeting. Fed representatives could tip the scales in one direction or another with their comments, but the "silence regime" forces market participants to draw their own conclusions in anticipation of the meeting in March. It will take place next week. As we see, EUR/USD traders were unable to come to a common opinion. The buyers are not able to resume the ascending movement to 1.10 whereas the sellers, in turn, cannot even enter the area below 1.09, not to mention overcome the level support 1.0890 (Tenkan-sen line on D1).
From a technical point of view, the situation also remains uncertain. On the daily chart, the instrument is between the middle and upper lines of the Bollinger Bands, above the Tenkan-sen and Kijun-sen lines, but at the same time in the Kumo cloud, the upper border of which corresponds to 1.0930. It is advisable to consider long positions only after EUR/USD has settled above this level. In addition, in this case, the Ichimoku indicator will generate a bullish signal, Parade of Lines. The nearest target for the upward movement is 1.0960 (the upper border of the Bollinger Bands on D1) and the psychologically important "round" level of 1.1000. The strongest resistance level is located slightly higher at 1.1050, the upper Bollinger Bands border on the weekly chart, but it is too early to talk about this target. Selling will be relevant only after consolidation below the level of 1.0890 (Tenkan-sen line on D1). Given the ongoing uncertainty, at the moment it is advisable to maintain a wait-and-see attitude for EUR/USD.