The foreign exchange market is trading slowly at the beginning of the new week, as seen by the modest range of movements; the US markets are closed in observance of Presidents' Day. The key events of the week are the Federal Reserve Minutes and the Core PCE for January. The dominant theme on the market remains the risk of a 50-basis point rate hike from the Fed in March, as well as the potential for the tightening regime to be extended through the first half of 2023. Conversations about a recession have died down somewhat after three key macroeconomic indicators in the US signaled the potential for an acceleration in the growth rates of the US economy in January. The expected terminal rate continues to increase as seen from fed funds futures prices, putting pressure on risk assets, while top-level managers at the Fed are increasingly adopting a hawkish rhetoric. The market may also pay attention to the PMI indices, as well as the upcoming testimony from the new head of the Bank of Japan who is not a fan of the previous head of the BOJ's methods.

Last week, the dollar index reached 104.60 (the maximum since January 6th) on the back of rising market anxiety that Powell's speech about increasing deflationary forces at the recent meeting does not match the incoming data. Starting from the publication of the payrolls report at the beginning of February, this anxiety has taken on a more widespread character, exacerbated last week by the publication of the January inflation report and retail sales with decent upside surprise. This week it is time to soberly assess the situation and carefully analyze the content of the latest Fed messages. The Fed minutes, to be released on Wednesday, will help to clarify the situation. In the current context, the key point in the minutes that will interest the market is to what extent the Fed was close to raising the interest rate by 50 basis points. If this outcome were taken seriously - the chances of it happening in March would sharply increase, as would the market's desire to build long dollar positions, on the expectation of another sale in Treasuries. Friday's release of the January core PCE deflator, expected at 0.4% on a monthly basis, should also shed light on the deflation story.

The baseline scenario, however, is that the February dollar rally is a correction and this week will determine whether this correction has prospects for development. In addition, this week will pay close attention to the speech of Russian President Putin. The dollar price will also be determined by the dynamics of the USD/JPY pair. In Japan, hearings will be held on the candidacy of the new Bank of Japan Governor Kazuo Ueda, who, according to reports, does not share the views of Haruhiko Kuroda on ultra-easy policy.

This week, attention in the euro zone will be focused on PMI and IFO indexes. PMI readings are hovering around 50 points, and the market may focus more on the February Chinese PMI data, which will be released later in the week. The dollar rally may have already gone too far, and the EUR/USD pair has found good demand at the 1.06 mark. On Wednesday, the FOMC protocol may require a more aggressive tone in order for EUR/USD to break through to 1.05, where, in my opinion, the main demand is concentrated and is capable of launching an EUR/USD rally in the second quarter.