The Fed meeting in December, the Minutes of the meeting, incoming January US soft and hard data – all of them indicate that the Fed may deliver the penultimate rate hike today and implicitly announce the end of the tightening cycle at the next meeting. However, core inflation in the US is still high and the labor market remains surprisingly resilient, so there is little sense for the Fed to materially revise its hawkish stance. The idea of another Powell protest today against the dovish market expectations that have been building since the beginning of the year is holding back a USD sell-off and curbs equity optimism.

For the last two weeks the dollar has shown stability (relative to performance in the first two weeks of January), fluctuations of the DXY index were limited in the range of 101.50-102.50. First of all, this could be a consequence of a defensive positioning in risk assets in response to a possible fork in the course of the Fed’s policy. The key benchmark of the US stock market, the S&P 500 fell to 3900 points in mid-January and then failed to move much above 4000 points. The second key asset class, bonds, has also seen consolidation, with the 10-year yield stabilizing around 3.5%. Signals of a slowdown in the US economy have created a situation where, in the event of a consistently hawkish stance by the Fed, market fears of a Fed policy error will increase, which may bring forward a downturn and even recession in the economy, during which demand for the dollar as a safe haven asset should increase significantly. Together, this led to the formation of the range in the dollar in the second half of January.

Today the dollar is losing ground; this is largely due to the dovish surprise in the second most important report on the US labor market – the ADP report. The agency estimated that job growth slowed to 106K in January from 273K in December. It was expected that the growth will be 178K. The situation in the US industrial sector in January was clarified by PMI from ISM. The weak reading (47 points with a forecast of 48 points) is likely to accelerate the movement of the dollar index towards the main support level (101.50), but the FOMC will determine the medium-term dynamics.

The European currency was supported today by the data on inflation in the Eurozone. Core inflation rose to 5.2% in January, headline inflation slowed down from 9% to 8.5%. Since the ECB, like other central banks, is predominantly targeting core inflation, a signal of core inflation persistence in January adds to the chances of a moderately hawkish stance on Thursday, which makes the EURUSD rally more likely, especially if the Fed opts for a maximally balanced stance.

Activity indices in the Eurozone from S&P Global for January (final estimate) were neutral (slight deviations towards more positive values in France and Italy, no changes in Germany).