FX.co ★ EUR/USD. The euro follows the dollar, and the dollar follows the Fed

The EUR/USD pair has been drifting, consolidating, and following the US dollar index's path. Yesterday, sellers attempted to push the price below the 1.0800 level, but today, buyers have brought the price back to the vicinity of the eighth figure.

The pair is in the "waiting area," according to the outcomes of the previous several days. The new pricing level has a framework that is only valid between 1.0870 and 1.0760. Yesterday, the pair's bears were unable to push the price down to the 7th figure's base, and the bulls are currently making futile attempts to move the price closer to the 9th figure's borders. Although buyers of the EUR/USD have consistently made the necessary attempts, the northern impetus was waning towards the target of 1.0870. To cross the resistance level of 1.0930, where the upper line of the Bollinger Bands indicator intersects with the upper boundary of the Kumo cloud on the weekly chart, traders will need a strong informational impulse. Buyers will have a clear path to the primary resistance level of 1.1000 if they can get beyond this price obstacle.

Events in Europe are on the ignore list.

The pair have been faithfully tracking the US dollar index, which itself exhibits inconsistent dynamics. The European currency is the supporting actor. Please be aware that yesterday's decline in the EUR/USD pair was accompanied by unexpectedly high ZEW readings. The German business sentiment index, in particular, increased to 16.9 points, while it was expected to remain in negative territory with a tepid rising trend. For the first time since February 2022, the indicator increased above zero. The European index of business sentiment also demonstrated a similar rise (it rose to 16 points, while experts expected it to be at -15 points). Additionally, at the beginning of the trading week, Philip Lane, the Central Bank's chief economist, joined the chorus of hawkish Governing Council members by asserting that interest rates "should be significantly higher than current levels." He made it clear that he would support a rate increase of 50 points at the following ECB meeting.

However, the EUR/USD pair was steadily declining yesterday despite such clear fundamental signs, which were being accompanied by a steadily rising US dollar index. Today, the opposite tendencies are evident: the USD is dropping across the board while the EUR/USD pair is displaying a resilient nature. As a result, the pair's future behavior will be correlated with that of the US dollar. For the time being, the single currency has taken the place of the previous leader.

The calm period before a storm

The current calm is only a brief respite before the major storm. The first meetings of the ECB and the Fed for 2023 will take place in two weeks, at the beginning of February. Therefore, each macroeconomic announcement, regardless of how major, and any comment made by regulators' representatives are taken into account and assessed through the lens of potential Central Bank decisions. For instance, the question about how much the Fed rate will be hiked at the next meeting was put to rest by the report on the growth of inflation in the United States that was issued last week. The CPI growth report shifted the scales in favor of a 25-point scenario if experts had debated two choices (25 and 50 points) at the start of the year. The probability of this situation is put at 92% by the CME FedWatch Tool. By the way, some Federal Reserve officials have already expressed support for a 25-point increase in public (among them: Patrick Harker and Rafael Bostic).

The pair changed the price level, for the first time in nine months, acquiring a foothold within the eighth figure, thanks to the report on the increase of inflation in the United States and the repercussions of this release (the anticipated slowdown in the rate of tightening of the Fed's PEPP). For further price growth, however, further information impulses are required. The idea that the American regulator may prematurely halt the present cycle of tightening monetary policy (by revising the level of the final rate) and even shift to a rate cut at the end of this year has therefore grown more prevalent in the market recently.

A hypothetical change to the hawkish rate, which would merely allow for a slowing in the rate of rate hikes, was not mentioned by Fed representatives, who had already stated their position following the publication of the report on the increase of inflation in the United States. Furthermore, despite declining inflation, Jerome Powell has indicated time and time again that rates will stay high "for a long time." The Federal Reserve meeting minutes from December state the same thing. Regarding the reduction of the final rate (downward), the Fed chairman gave himself some leeway by saying that the speed and magnitude of the hike will depend on the arrival of new data. But, as I said earlier, Powell expressed all of the aforementioned views even before the December inflation report was released.

Conclusions

The northern prospects of the EUR/USD are, in my opinion, in the hands of the Fed officials as the pair approaches the intermediate resistance level of 1.0930 and the major one - 1.1000. Our understanding of their rhetoric will help us predict the dominant and prevailing emotions at the Central Bank meeting in February.

The next speeches made by Federal Reserve members should be carefully considered because they will soon be required to adhere to the "silent regime" (the 10 days before the meeting). Let me remind you that Lorie Logan, Susan Collins, Lael Brainard, Christopher Waller, and John Williams will all be speaking at once on Thursday and Friday on behalf of the American regulator. Given that the price dynamics, as we can see, coincide with the dynamics of the US dollar index, they have the potential to drastically "redraw" the fundamental picture for the EUR/USD pair. The resistance level of 1.0870 and the support level of 1.0760 will be challenging for the bulls and bears of the pair, respectively, to overcome in the absence of new informational momentum.