EUR/USD Latest: stubborn EZ CPI, less dovish Fed, and no rate cuts in sight

EUR/USD reinforced its bearish view on Wednesday as the Federal Reserve pushed back on expectations for a rate cut as soon as March. Markets had gotten slightly ahead of themselves in pricing in rate cuts since the December FOMC meeting as Powell came out unexpectedly dovish. As other FOMC members came out to tone down the dovish messaging, some of the corrections in the dollar had already taken place in the first four weeks of the new year, aided by the stronger economic data in the US. But Wednesday’s meeting reinforced that market pricing of rate cuts continues to be too aggressive, suggesting further adjustments are needed.

That said, most of the re-pricing was evidenced in the stock market as it appeared to have put more weight on imminent rate cuts. Whilst the dollar started the correction earlier this year, equity indices still managed to push to all-time up until a few days ago as they continued to ride out the dovish wave from the December meeting. This meant they had more ground to cover on the back of the less-dovish-than-would-have-hoped-for messaging from Powell this week. 

However, some of the negative bias in EUR/USD was reversed mid-morning as the preliminary CPI data for January showed inflation remaining elevated in the first month of the year. Both headline and core inflation dropped marginally from December, but they came in slightly above expectations, once again pouring cold water on dovish hopefuls. That said, both core and headline CPI came in negative on the monthly reading, suggesting prices have dropped in January, a positive sign that the disinflation trend is continuing, and lower CPI can be expected in the coming months. 

EZ January preliminary CPI data

Source: investing.com

Whilst the inflation data can be construed to have neither a strong dovish nor a strong hawkish impact on the ECB, recent commentary from Lagarde emphasized that the central bank is not yet ready to start considering cutting rates. She reiterated that the disinflationary process needs to be more advanced before cutting, and that wage data is going to be critically important. 

The fact that both the Federal Reserve and the European Central Bank continue to defend their hawkish stances and are pushing back on providing timing for rate cuts leaves EUR/USD without a clear direction in the short-to-medium term. So far, the USD seems to be outweighing the EUR as investors have flocked from stocks to bonds in a classic risk-off move following the FOMC meeting. This has pushed up the dollar and is likely to keep it supported over the coming days as traders try to find a direction. The January jobs data in the US released on Friday could provide some momentum to the pair, and it will all depend on how the reading fits into the “rate cut” rhetoric. If it continues to support the theory of a buoyant economy then expectations for rate cuts in the US could be pushed back even further, weighing on EUR/USD. Traders will need to watch out for the 100-day SMA (1.0773) as a drop below this level could open the door to further weakness towards the 1.07 mark. Conversely, a weaker jobs reading may unwind the recent push towards US bonds and the dollar, allowing EUR/USD to recover some bullish momentum, aiming towards the 200-day SMA at 1.0840. 

EUR/USD daily chart

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