Forex analysis review

Forex analysis review

EUR/USD. Preview of the week. All eyes on US inflation

Posted: 08 May 2022 03:16 PM PDT

The first days of May passed under the sign of uncertainty. The EUR/USD pair could not decide on the vector of its movement. The bulls failed to develop a large-scale correction and keep the price in the area of the 6th figure, while the bears failed to settle in the area of the 4th figure. The parties ended the trade at 1.0551, that is, in the middle of the conditional range. Obviously, next week the struggle will continue: either the bears will break through the defense and go below the support level of 1.0450 (the lower line of the Bollinger Bands indicator on D1), or the EUR/USD bulls will settle above the Tenkan-sen line on the same timeframe, which corresponds to the mark 1.0600. It is unlikely that the price will flat around the fifth figure, given the fact that on May 11 the most important inflation report will be published, which will have a strong impact on the dollar.

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In general, the upcoming week is full of events of a fundamental nature. For example, many representatives of the Federal Reserve and the European Central Bank are expected to speak within five trading days. In particular, Christopher Waller, Loretta Mester, John Williams (they have the right to vote in the Committee), Neil Kashkari, Mary Daly and Raphael Bostic will voice their position. The ECB will be represented by Bundesbank President Joachim Nagel, Executive Board members Isabelle Schnabel and Frank Elderson, as well as ECB Vice President Luis de Guindos and ECB President Christine Lagarde. They can outline the main contours of the "road maps" of the central banks.

For example, with regard to the Fed, the question here is how much the Fed is ready to raise interest rates at the next meeting in June. After the publication of Nonfarms, you can count on a 50-point increase with a certain degree of confidence. If the majority of speakers in one form or another support this idea, the dollar will receive support. But if some members of the Fed talk again about the option of a 75-point increase, the greenback will significantly strengthen its position. Let me remind you that at the final press conference, Fed Chairman Jerome Powell said that the Committee is discussing this scenario "not very actively." That is, he did not categorically deny such a possibility, thereby leaving himself "room for maneuver" if US inflation continues to show steady growth.

Actually, that is why the most important release of the week will be a report on the growth of the consumer price index in the US. Here again it is necessary to return to the results of the May Fed meeting. First, Powell said that the option of raising the rate by 50 basis points "will remain on the agenda for the next couple of meetings." This suggests that the central bank may decide to take 50-point steps at the June and July meetings. Secondly, as mentioned above, the head of the Fed did not categorically exclude the option of a 75-point increase. Much will depend on the dynamics of inflationary growth. U.S. inflation will gradually "flatten out" this year, Powell said. In particular, he stated that at the moment "there is some evidence" that the underlying PCE is reaching or has already reached its peak. A similar trend, according to Powell, will be demonstrated by other inflationary indicators.

Core PCE has indeed broken off its months-long trendy rally. At the same time, this index still remains at the level of 39-year highs (in annual terms). The dynamics of the consumer price index will swing the pendulum in one direction - either towards the dollar, or against it. If the report comes out in the green zone, the likelihood of a 50-point rate hike in June will increase to the maximum. Rumors will also intensify that the central bank will decide on a 75-point breakthrough at the next meeting. However, in the opposite case (if it comes out in the red zone), the dollar will sink throughout the market. EUR/USD bulls in this case will have a reason to settle above 1.0600.

According to preliminary forecasts, the overall consumer price index in annual terms should reach 8.1%. This is definitely a strong result. But in March, the overall CPI jumped to 8.5%, so if the above forecast comes true, it will indicate a slowdown in multi-month growth. The core consumer price index, excluding food and energy prices, should also show a slight pullback from the March result. If in March the core CPI came out at 6.5%, by the end of April it should reach the target of 6.0%.

In other words, if the inflation report comes out at the level of forecasts, the dollar may be under certain pressure. If the release has a "red color", then EUR/USD bulls will be able to develop a larger-scale correction. However, if the components of the report are released at least at the March level, the greenback will organize a dollar rally - including in pair with the euro (which means testing the support level of 1.0450).

Other significant releases of the upcoming week include: German ZEW indices (Tuesday), inflation data in Germany (Wednesday), US producer price index (Thursday) and consumer sentiment index from the University of Michigan (Friday). But all these reports will be of secondary importance in the context of the EUR/USD pair, compared to the key inflation report, which will be published on Wednesday, May 11th.

In my opinion, corrective pullbacks in the pair can still be used as an excuse to open short positions. In any case, the Fed will remain hawkish (regardless of April inflation) - the only question is the degree of the US central bank's "decisiveness". While the ECB is still cautious, despite the record growth in inflation in the eurozone. That is why it is advisable to sell the EUR/USD pair on corrective waves with the main targets of 1.0550, 1.0500 and 1.0450.

The material has been provided by InstaForex Company - www.instaforex.com

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