The United States Bureau of Labor Statistics (BLS) is set to release the Consumer Price Index (CPI) inflation report for February on Wednesday at 12:30 GMT. The data is expected to have a significant impact on the US Dollar (USD) and the Federal Reserve’s (Fed) monetary policy stance.
February CPI Forecast
Annual inflation, as measured by the CPI, is projected to slow slightly to 2.9% in February from January’s 3.0%. Core CPI inflation, which excludes volatile food and energy prices, is also expected to ease to 3.2% from 3.3% in the previous month. On a monthly basis, both headline and core CPI figures are anticipated to rise by 0.3%.
Analysts at TD Securities predict a cooling in core CPI after January’s sharp increase of 0.45%. “We expect a slowdown in both goods and services inflation, with owners’ equivalent rent (OER) inflation reaching a three-month low,” they noted. On a year-over-year basis, headline and core CPI are expected to decline by a tenth of a percentage point each, to 2.9% and 3.2%, respectively.
Impact on EUR/USD and Fed Policy
Amid concerns over a slowing US economy and trade tensions under former President Donald Trump, markets have adjusted their expectations for Fed rate cuts. Current forecasts price in 85 basis points (bps) of easing this year, up from 75 bps on Monday, according to LSEG Fed interest rate probabilities.
The latest US economic data has been underwhelming. February’s Nonfarm Payrolls (NFP) report showed the economy added 151,000 jobs, falling short of the 160,000 estimate. The unemployment rate climbed to 4.1%, exceeding expectations of 4%. Meanwhile, the labor force participation rate edged lower to 62.4% from 62.6% in January.
Despite this, Fed Chair Jerome Powell has signaled a cautious approach to rate cuts, stating that the economy remains “in a good place.” The upcoming CPI report could influence the Fed’s policy direction and impact the USD’s trajectory.
A larger-than-expected drop in inflation could reinforce confidence in the disinflation trend, prompting the Fed to accelerate rate cuts and weakening the USD. Conversely, if inflation surprises to the upside, the Greenback could regain strength as markets adjust to a more hawkish Fed stance.
EUR/USD Technical Outlook
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, suggests EUR/USD may face buyer exhaustion in the near term, as the Relative Strength Index (RSI) remains in overbought territory above 70. However, any dip is expected to find strong support at key moving averages.
“EUR/USD must sustain levels above the November 6, 2024, high of 1.0937 to continue its uptrend toward the psychological 1.1000 level. The next bullish target stands at 1.1050,” Mehta explained. On the downside, key support levels lie at the 200-day SMA of 1.0721, followed by the March 5 low of 1.0602 and the 21-day SMA at 1.0546.
With the Fed’s next moves hanging in the balance, all eyes will be on the CPI data, which could set the tone for US monetary policy and global currency markets.
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