FX.co ★ USD: dollar's March peak could boost euro

The US dollar is preparing to push new highs after the March meeting of the Federal Reserve. Earlier, USD reached a 19-month high.

The upcoming interest rate increase has not been fully priced in, experts say. According to JPMorgan Chase strategists, the dollar could rally after the Fed hikes the interest rate. The peak would come 1-2 months after the increase, Daniel Hui, executive director of global FX strategy at JPMorgan Securities told Bloomberg. "The market is trying to chase the Fed, because clearly this is a very unusual cycle," he added.

Early this week, Fed officials supported an increase in March, but urged caution, lowering market expectations of a 50 basis point hike. The US dollar recovered following three weeks of losses. Earlier, USD reached a 19-month high of 97.441 at the end of last week, pushed up by expectations of an interest rate increase by 50 basis points.

On Monday, the euro briefly advanced against the US dollar, but reversed course later. EUR/USD reached a new low on Friday, dropping to 1.1121 before bouncing upwards. The pair surpassed 1.1200 on Monday and hovered near 1.1244 early on Tuesday, raising hopes of a further increase for the European currency.

EUR/USD's price dynamics resemble its situation in February-May 2020. The pair could perform a correction at the Fibonacci level of 61.8%. In this situation, EUR/USD could climb towards the high at 1.1340 before stabilizing in the 1.1200-1.1350 range and rising upwards, analysts say.

This week's economic calendar is full of important events. On Thursday, February 3, the European Central Bank will hold its meeting, followed by the release of US labor market reports for January on Friday, February 4. These events could be positive for the dollar and the euro. The ECB could adopt a hawkish stance in response to soaring inflation, particularly in Germany. In January 2022, Germany's CPI increased by 0.4% month-over-month. Economists predicted an increase of 0.3%. The annual inflation rate in Germany fell to 4.9%, compared to a projected decline to 4.3%. The Eurozone's GDP rose by 0.3%, raising hopes of an economic recovery in the region.

In the meantime, the US economy could slow down in Q1 2022, analysts predict. The GDPNow model by the Federal Reserve Bank of Atlanta indicates that the GDP could rise by only 0.1%. Disappointing US labor market data for January could put pressure on the US economy. According to early projections, the number of new jobs could fall short of 153,000 or could decline substantially.

The euro could find support in weak US jobs data, but a possible US stock market slump would undermine the European currency. The pair could rise to 1.1340 before Friday's data is released. USD is expected to rise in the medium term, with EUR following suit.