EUR/USD almost erased Warsh-driven selloff ahead of the ECB decision. What to watch next?

The useful part

The US dollar has been losing ground ever since the NFP report got released. This happened mainly because the market focus was not on the NFP report, but on the CPI. The market pays attention to the data that the central bank is focused on, and the Federal Reserve is currently focused on inflation.

How it works

• Conversely, an upside surprise in core monthly inflation data will likely trigger another rally on a hawkish repricing.
• The central bank is expected to retain a data-dependent, meeting-by-meeting approach and Lagarde isn't seen explicitly pre-committing to another hike.
• Today, we get the US PPI report and although it might be market-moving, the US CPI due tomorrow remains the key event ahead of the FOMC decision next week.
• A soft or in-line CPI will likely weaken the dollar as Fed's Waller mentioned that he won't consider a rate hike unless we get a hot CPI.
• Keep in mind that the market is also focused on the Iran war and the surging oil prices as they add upside inflation risks.

What to take from it

For this reason, the CPI reaction might not even be as straight-forward as expected, so traders might want to use a lower position size. On the EUR side, the ECB is widely expected to hike interest rates by 25 bps today, bringing the policy rate to 2.50%. We also get the macroeconomic projections where growth forecasts are expe...