EUR/USD advances ahead of US CPI

The EUR/USD pair is running higher into potential resistance. All eyes are now focusing on the Federal Reserve, European Central Bank, and Tuesday´s US Consumer Price Index, CPI.

The pair up by over 0.9% in midday trade on Wall Street aided by a weaker US dollar and ahead of the European Central Bank’s policy meeting on Thursday. Expectations call for the ECB to deliver a 50-basis point hike and hawkish rhetoric is assumed which is buoying the Single Currency which has traveled from a low of 1.0650 to a high of 1.0748 so far.

The US dollar continued to bleed heavily on Monday as markets bet the Federal Reserve will be less aggressive in raising interest rates to curb inflation. US authorities have made moves to try to lessen the damage from the recent collapse of Silicon Valley Bank.

A new Bank Term Funding Program will offer loans from the Fed of up to one year to depository institutions, backed by United States Treasuries and other assets these institutions hold. Consequently, the US dollar index has dropped to a fresh low of 103.484, tracking the fall in short-dated Treasury yields.

The two-year note was paying as low as 3.997% at one point in New York trade and tumbled from the start of the week´s highs of 4.534% in the biggest one-day drop since the financial crisis of 2008, on track for its biggest three-day decline since the Black Monday crash of 1987. Meanwhile, Fed funds futures have been repriced as traders expect that the Fed’s terminal rate will be lower.

Markets are now pricing as low as 4.14% for December which was originally priced above 5% on Friday. Moreover, futures are showing a 21% chance of no hikes in rates from the Federal Open Market Committee when announcements will be made on March 22.

The US Consumer Price Index data will be released on Tuesday morning in the US session and traders will use the data to speculate how the Federal Reserve will react later this month when the central bank will meet to decide on its interest rate setting.

´´The release of US CPI inflation data tomorrow is expected to show headline price pressures remains high at 6% YoY, above the Fed’s 2% Inflation forecast. If the Fed were to back away from its tightening cycle, it may have a credibility issue on its hands.

For some years Fed officials have argued that monetary policy is not the right tool to tackle financial stability. Fed has announced some arrangements over the weekend in conjunction with the Treasury to stop contagion risks from the SVB crisis, the FOMC may favor continuing to hike rates next week with a focus on the inflation risks.