EUR/USD: Long At 1.1080, US CPI In Focus

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EUR/USD: US CPI In Focus

• San Francisco Fed President John Williams said the Federal Reserve should stick with its plan to raise interest rates gradually, given his view that unemployment is headed to 4.5% by late this year and inflation is set to reach 2% in two years. He said his outlook has changed little since December, when he and other US central bankers raised interest rates and signaled they were inclined to hike borrowing costs four more times this year.

• Williams' sentiments clash with those of many investors who have increasingly bet that worsening global conditions, including a slowdown in China's economy, will delay further monetary policy tightening, or even force the Fed to reverse course. Our forecasts are closer to Williams’ view than current market consensus, which in our opinion is too dovish.

• The minutes of the European Central Bank's January meeting showed growth and inflation risks are on the rise in the Eurozone and some policymakers are advocating the need to act pre-emptively in the face of new threats. The ECB said: “There were stronger signs again that repeated downward revisions of the inflation outlook were feeding through to inflation expectations, which had again increased the probability of the euro area economy remaining in low inflation environment for an extended period of time.”

• Although the ECB left rates unchanged in January, it promised to review and possibly recalibrate its policies on March 10, a statement understood by markets to mean that policy easing is highly likely. Euro zone money markets fully price in a 10-basis-point cut in the ECB's deposit rate to minus 0.40% at the ECB's March 10 meeting. Another cut of 10 basis points is priced in for later in the year. The ECB already cut its deposit rate in December and extended its asset buying programme but much of the effect of its policy easing has been reversed by tighter financial market conditions. The EUR appreciated, reducing imported inflation and holding back overall price growth. The January minutes of the ECB meeting provided very little new information with regard to policy preferences ahead of the March meeting.

• The EUR/USD fell slightly today and our buy offer was filled at 1.1080. There are some important resistance levels ahead: 1.1141 (7-day exponential moving average), 1.1149 (daily high on February 18), 1.1179 (daily high on February 17). Breaking above these levels will open the way to stronger gains. A significant support level is 50% fibo of January-February rise at 1.1042.

• Investors will be focused on US CPI data today (13:30 GMT). We expect CPI to rise to 1.3% yoy from 0.7% yoy in the previous month. Core CPI is likely to stay unchanged at 1.9% yoy.