There is a storm brewing in the Forex market and Euro (EUR) and Dollar (USD) rates!  The analyst warns

foot. Yue Mok/AFP/East News

At the beginning of a new trading week For EUR/USD It moves “lazily” around the 1.0950 level. Initially, the bears had the initiative, trying to drag the pair towards the 1.09 level. However, the downward movement stopped around the 1.0920 level. Then the sellers took the initiative, but they also failed to show impressive results. Traders are not willing to open large trades with an almost empty economic calendar – neither bulls nor bears. Especially since the main macroeconomic publications of the week will be published later. Right now, both sides are trying to reach the 1.09 level. However, for a decisive move – above 1.1000 or below 1.0900 – a strong push is needed. In the absence of such a catalyst, traders are forced to remain in a relatively narrow price range, “on hold.”

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On the dollar side, there was a slight weakening in dovish expectations regarding the Federal Reserve's future actions and an increase in risk aversion in the markets.

after December Nonfarm Payrolls Report The probability of a 25 basis point rate cut in March fell to 60%. At the same time, the probability of maintaining the status quo rose to 36% (the remaining 4% is the probability of a 50 basis point rate cut). Last week, before Friday's release, the probability of a rate cut in March was 75%. Although the Non-Farm Payrolls report had its flaws and even the ISM Services PMI fell into the red, the market began to doubt whether the Fed would start cutting interest rates in early spring, providing support to the US dollar.

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Rising geopolitical tensions are also supporting the dollar. Attention returns to The Middle East. Two days ago, Lebanon warned Israel of the danger of a large-scale war between the two countries. Lebanese Prime Minister Najib Mikati calls on Israel to withdraw from the Gaza Strip, warning of the danger of further escalation in the region with the possibility of an all-out war “in the event of any attacks on the lands of southern Lebanon.” The Red Sea also remains tense. As is well known, a Yemen-based rebel movement recently attacked a number of ships in the southern Red Sea, including the Maersk, disrupting global trade and raising fears of a new rise in global inflation as shipping rates fall. Interest rates have risen significantly, and growing risk aversion in markets is providing a backdrop to support the dollar, but not enough to spur even a modest “small rally.” dollar.

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Inflation works to your advantage euro. W In the euro zone, it rose to 2.9% in DecemberIt is half a percentage point higher than in November. Inflation reports in European Union countries also reflected high inflation rates. The strongest increases were recorded in Slovakia (6.6%) and Austria (5.7%). The largest economies in the European region also recorded significant inflation rates: in Germany, inflation reached 3.8% in December, And in France 4.1%. The main factors behind the price increase were higher prices for food, alcohol and tobacco (+6.1%), services (+4%) and industrial goods (+2.5%). In contrast, energy prices fell by 6.7% compared to December 2022. However, there is also a nuance: in November, this part of the report fell by 11.5%. European Central Bank President Christine Lagarde said late last year that she expected a new round of inflation after canceling fuel, gas and electricity subsidies. In this context, she said that the central bank may not start lowering interest rates “for the next few quarters.” Lagarde's predictions have come true: energy subsidies have already been canceled and inflation in the eurozone (after Germany and France) has already begun to improve. As a result, expectations for further easing measures by the European Central Bank have weakened.

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Therefore, the upcoming US inflation reports will play a very important, if not decisive, role for the dollar, and thus for the EUR/USD pair. At stake now is the growing divergence in the policies of the Federal Reserve and the European Central Bank. If US inflation shows a downward trend again, the probability that the Fed will cut interest rates in March will increase. This will allow the bulls to attack with a target of 1.1010 (Tenkan-sen line on the daily chart). However, if inflation data is released in the “green zone”, the bears are likely to take the lead with a target of 1.0850 (the upper line of the Kumo Cloud in the same time frame). I remind you of that US Consumer Price Index It will be released on Thursday (January 11) and the producer price index on Friday.

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