The new trading week began with a slight correctional pullback of the US dollar index: if on Friday, trades closed at 90.968, then during Monday's Asian session, the indicator rose to 91.088. It was only a minimal correction, so the main dollar pairs are traded quite weakly in a narrow price range. In particular, the EUR/USD pair was entirely fluctuating in the 20-point price range, ignoring the minimum correction of the US dollar. Now, the market is waiting for the next information drivers.
In this context, it should be noted that there will only be few events this week. This means that the economic calendar for the EUR/USD pair will not have much important releases.
This week's most interesting events will happen on Wednesday, February 10. At the start of the US session, there will be a publication of data on US inflation growth, from which positive dynamics are expected: January's general consumer price index is predicted to reach 0.4% in monthly terms, and to 1.5% in annual terms. In addition, core inflation should show similar dynamics: forecasted growth is by 0.3% in monthly terms and by 1.6% in annual terms. Based on the latest Nonfarm, it can be recalled that salaries in January showed an illogical result amid a sharp decline in the number of employees. Experts believe the average hourly wage indicator showed a wrong picture – the figures strangely rose due to the disproportionate loss of work by low-paid workers and their reduced wages (and not because of the general increase in wages). Therefore, the indicator may show the actual values next month. A similar situation was observed in the spring of last year in view of the first wave of the coronavirus crisis. But after an unusually strong growth, the indicator collapsed into the negative area, and immediately to -1%.
Against the background of failed Nonfarm data, the role of the growth of US inflation data will be very important. It should be remembered that almost all the components of Friday's release came out in the "red" zone (except for the unemployment rate), and the indicators of the previous months were significantly revised downwards. Therefore, if inflation indicators also surged, then the early curtailment of QE will be unlikely.
Also on Wednesday, Fed's Chairman, who will speak at the webinar, will comment on the current situation. The topic of the presentation was entitled "The State of the Labor Market in the USA"'. It can be recalled that after the results of the last Fed meeting, Powell said that the regulator will remain committed to an ultra-soft monetary policy. The current pace of $ 120 billion-a-month bond repurchases will continue until "substantial and sustained progress" is made on meeting employment and inflation targets. At the same time, he stressed that the incentive programs will be expanded if necessary. The Central Bank did not announce any clear criteria in this context, but in this case, it is obvious that traders should focus on the dynamics of the labor market, inflation and the country's economy as a whole. In fact, the failed Nonfarm data were published just a week and a half after the February meeting. Given the topic of the webinar, the FRS head will definitely comment on this release. If he allows QE to expand, the US dollar will come under additional pressure.
On another note, political fundamental factors are kept apart. The focus here is on the "American Rescue Plan" and the political crisis in Italy. In my opinion, events in the US will gradually disappear, as the Democratic Party actually had the more advantage in its confrontation with the Republicans last week. In particular, the Democrats managed to approve a budget resolution that allows them to pass the resonant 1.9 trillion bill by a simple majority – both in the House of Representatives and in the Senate. Therefore, the very fact of the approval of the "American Rescue Plan" will not surprise anyone, as the market already worked out this factor during the previous week.
However, the intrigue about the Italian events persists. It is worth noting that Italy's ruling coalition collapsed after ex-Prime Minister Renzi left it. After several attempts to solve the coalition again, the current Prime Minister, Giuseppe Conte, resigned. The country was on the verge of early elections. Last week, the Italian president made a final attempt to resolve the political crisis by asking former ECB's head, Mario Draghi, to form a "technocratic government." Over the weekend, Draghi held the first round of negotiations. As a result, many political forces expressed support for him (in particular, Silvio Berlusconi's party "Forward, Italy" and "Liga"). Today, the ECB's ex-Chairman, who may become the new prime minister of Italy soon, begins the second (decisive) round of negotiations. The question to these questions will be clear before Wednesday: Will Draghi be able to form and lead a new cabinet of ministers or will the political crisis be worsened by early parliamentary elections?
In turn, the European currency will react accordingly. In the case of a positive outcome, the euro will receive significant support, as the Italian epic, which has been going on for more than one week, exerts background pressure on the currency.
Therefore, preconditions are considered for the further growth of EUR/USD pair this week, especially if the US inflation disappoints, J. Powell voices his "dovish" rhetoric, and Mario Draghi confirms its reputation. At the moment, the main currency pair entered the consolidation stage after an upward trend on Friday. Against the background of an empty Monday, a deeper price pullback is likely, but the pair is not expected to leave the area of the 1.20 level. Thus, any downward pullbacks can be used to open long positions with the first target of 1.2060 (Tenkan-sen line on the daily time frame) and the current main target of 1.2100 (average line of the Bollinger Bands on the same timeframe).
