Traders on tenterhooks ahead of release of US CPI

US CPI is likely to be a major driver for EUR/USD. 

Economists expect the US Consumer Price Index ex Food and Energy to moderate to 3.7% YoY in February, from 3.9% in January, and to gain 0.3% MoM from 0.4% previously. 

The broader headline CPI figure is forecast to show a 3.1% YoY rise in February, unchanged from the previous month, and a 0.4% rise MoM from 0.3% registered in January. 

According to the CME FedWatch Tool, which calculates a market-based expectation of when the Federal Reserve will begin reducing its Fed Funds Rate, the probability of a first cut in March is 3%, of one or more 25 bps cuts by May 17.1%, and one or more cuts by June 71.4%. The probabilities for May have substantially fallen overnight, from over 30% on Monday. 

Euro overpriced and likely to fall 

The Euro is overpriced given the relatively weaker growth in the Eurozone and the likelihood of earlier rate cuts in Europe compared to the US, says BNY Mellon strategist Geoffrey Yu. 

In an interview with Bloomberg news on Monday, the strategist said he expects the Euro to weaken against the US Dollar in 2024. 

“I’m still holding onto my view that at some point this year we’re going to get parity with the Dollar,” said Yu. 

Weakness is likely to come from a two pronged attack on the Euro, from a combination of a weak economy and the European Central Bank (ECB) cutting interest rates before the Fed. 

Recently EUR/USD failed to sustain highs just shy of 1.1000 after Banque de France Governor, François Villeroy de Galhau and Bundesbank President Dr. Joachim Nagel, both said that a rate cut in the spring might be warranted. 

De Galhau said that “spring goes from April to June 21.”

Their stance is more radical than that of ECB President Christine Lagarde, who said she saw June as the time for the ECB to review its interest rate policy at her press conference after the policy meeting on March 7.