Data on the growth of European inflation could not support the EUR/USD pair and the price remained within the range of 1.2250-1.2340. The release turned out to be very controversial. On one hand, the annual consumer price index came out at the forecast level, resuming growth at 1.4% but on the other hand, the core inflation index showed stagnation, remaining at the level of 1%. Experts expected minimal movement but still they looked forward to growth. Due to this, the published figures significantly disappointed the market.
As a result, February inflation did not clarify the prospects of the European QE. Even the strengthening of the labor market in the euro area to a record 8.5% in a 10-year minimum was indifferently perceived by traders. All of this is because of the decrease in unemployment. The level of wages is growing extremely poorly which is a similar situation, incidentally, in the US. The index fluctuates in the region of 1.4-1.7% month after month, demonstrating a contradictory dynamics.
At the moment, many members of the ECB remain optimistic and confident that the stimulus program will be completed this year. February inflation is unlikely to radically change their opinion on this matter. However, the question of raising rates is likely to be relevant only when the main CPI approaches the target level. The position of Jens Weidmann, who did not rule out tightening of monetary policy next year, was not supported by his colleagues. The remaining members of the European regulator still take a cautious stance even in the issue of completing the QE.
However, it is not only contradictory statistics that put pressure on the euro. The other day in the market, there were rumors that the successor of the head of the ECB, Mario Draghi, could be the head of the Central Bank of Finland, Erkki Liikanen. According to the information of the American press, he can become the compromising figure if the Germans cannot lobby the appointment of Weidman. Liikanen has been the head of the Finnish Central Bank for 15 years and he was originally a supporter of "hawkish" decisions. However, over time, he took a more centrist position and recently even advocated the prolongation of the QE action. In this regard, Liikanen is the antithesis of Weidman, so his appointment will be bad news for the European currency.
Such rumors exert indirect pressure on the euro. Traders do not rush to panic. First, Jens Weidmann remains the main candidate. The head of the ECB, Germany, of course, can "change" for other priorities (in order not to make political concessions to the Italians and the French on other issues in the future), but this assumption is too hypothetical.
Secondly, the political picture in Europe will change significantly after the elections in the European Parliament, which will be held early next year. The question of the successor will surely be decided after the pre-election race. And, thirdly, Liikanen, along with Weidmann, is not the only likely candidate. According to a number of analysts, the head of the Central Bank of the Netherlands Klaas Knot, who known to take "hawkish" positions, also has good chances to become head of the ECB.
In other words, the EUR/US flock completely corresponds to the contradictory fundamental background when neither the bears nor the bulls of the pair have arguments and forces to scale the movement.
In turn, the US currency is in anticipation of tomorrow's nonfarm payrolls. A report published yesterday by the ADP says that the labor market in the US will again show steady growth. However, traders actually ignored yesterday's report and it is most likely that similarly, they will ignore official data on unemployment. Only the inflationary component of nonfarm payrolls is interesting which is the level of average hourly wages. According to the general forecast, this indicator will show a slight increase of up to 0.3% on a monthly basis and of 2.7% in the year-on-year basis.
Even a minimal deviation from this forecast will cause strong volatility in the EUR/USD pair. The direction of movement, of course, will depend on the direction in which the indicator deviates. A few hours after the release, the situation will be commented on by the head of the Fed, Jerome Powell, who will make a speech in Chicago regarding the prospects for the economy. Given the topic of the speech, he will certainly express his position on the growth of the labor market and the level of salaries. Depending on the tone of the comments, traders will increase or decrease the probability of a fourfold rate hike by the end of this year. Therefore, it is suggested to not make trading decisions immediately after the publication of nonfarm payrolls because the rhetoric of the head of the Federal Reserve can significantly change the mood of the market.
On the technical side, the EUR/USD pair is still at a crossroad. Despite the sluggish downward movement, the pair is still within the wide-range flat. The bulls of the EUR/USD need to gain a foothold above the level of 1.2325 (the upper limit of the Kumo cloud on the daily chart) to confirm the northern trend, while the pair's bears need a larger jump below 1.2145 to resume sustained downward movement. Tomorrow's fundamental picture will determine the vector of the pair's movement to one of these parties so all attention is focused on the American trading session on Friday.
