The euro-dollar pair closed Friday's trading at 1.0834, indicating a general weakness in the U.S. dollar. Despite a significant price increase, EUR/USD buyers hesitated to challenge the 1.09 level. After a weak U.S. labor market report was released, the pair spiked to 1.0890, but traders took profits at that point. Consequently, the pair retraced by 50 pips in response to Jerome Powell's speech.

The weekly EUR/USD chart shows that the pair has gained more than 500 pips over the past week—its fastest rise in the last 16 years. The main reason is the increased risk of stagflation in the U.S. due to the White House's tariff standoff with the world's largest economies. Previously, since Trump's election victory, the trade war theme had supported the greenback. Now, however, we are seeing the opposite effect. The market has reasonably concluded that the Federal Reserve will be forced to ease monetary policy more aggressively than expected in December, responding to sluggish economic growth. Market expectations have shifted accordingly. Traders remain confident that the Fed will maintain its current policy stance this month. However, forecasts for future meetings have softened. According to the CME FedWatch tool, the probability of a rate cut at the May meeting has risen to 50%, while the likelihood of a cut in June now stands at 87%.

Dovish expectations have increased not only due to potential trade war consequences but also because of weak macroeconomic reports. The ISM Manufacturing Index, retail sales, and consumer confidence index all came in below expectations, adding pressure on the greenback. February's Nonfarm Payrolls report was also disappointing. Employment rose by 150,000 jobs, below the 12-month average of 170,000, while figures for the previous two months (January and December) were revised downward. Unemployment (U3) climbed to 4.1% (versus the expected 4.0%). The broader U6 unemployment rate, which provides a more comprehensive measure of labor market conditions, jumped to 8.0%—its highest level since October 2021. The labor force participation rate fell to 62.4%, the lowest since January 2023.

Inflation reports could reinforce this already concerning picture, exerting additional pressure on the dollar. In the upcoming week, key inflation indicators—CPI and PPI—will be released, potentially strengthening or weakening dovish sentiment.

On Wednesday, March 12, we will learn the February Consumer Price Index (CPI) figures. Headline CPI has shown an upward trend over the past three months, reaching 0.5% in January. However, it is expected to slow to 0.3% in February. On a yearly basis, the index rose for four consecutive months (from October to January), peaking at 3.0%, but is forecasted to decline to 2.9%. The core CPI excludes food and energy prices and is also expected to slow—from 0.4% to 0.3% month-over-month and from 3.3% to 3.2% year-over-year.

Analysts anticipate only a slight deceleration in inflation, but the key takeaway is that even if the data matches expectations (let alone comes in weaker), the dollar will come under pressure.

Another important inflation gauge—the Producer Price Index (PPI)—will be released the next day, March 13. A similar pattern is expected here, with a slight decline following months of growth.

On Friday at the University of Chicago Booth School of Business, Fed Chair Jerome Powell noted that progress in slowing inflation will "likely continue but will be uneven." If the upcoming inflation reports show signs of weakening (especially given the January slowdown in the core PCE index), the likelihood of a rate cut in May will increase further, tipping the balance in favor of a dovish scenario. Currently, the odds stand at 50/50.

Notably, the final downside pullback in EUR/USD on Friday was driven by Powell's speech, in which he stated that the U.S. economy remains strong and that the Fed sees no urgency in further rate cuts.

However, there are some caveats. First, Powell referred to the March Fed meeting, where traders expect no policy changes. Second, during his speech, he expressed concern about rising uncertainty. He noted that the effects of trade tariffs and declining consumer confidence still need to be assessed, stating, "The consequences of these changes will be significant for the economy and U.S. monetary policy."

In other words, Powell's Friday speech can hardly be called hawkish. Any downward pullbacks in EUR/USD should be seen as buying opportunities. The nearest upside target is 1.0850, the upper line of the Bollinger Bands indicator on the weekly chart. The main target is 100 points higher, at 1.0950—the upper boundary of the Kumo cloud on the same timeframe.