The Chinese economy is slowing down and risks falling into even deeper hole amid mass protests over the zero-COVID policy. US stock indices are ready to open in the red zone due to events taking place in China. European inflation, according to Bloomberg experts, will slow down, which reduces the likelihood of a 75 bps increase in the deposit rate at the December meeting of the ECB. All these factors are generally seen as negative for the euro, but instead of falling, EURUSD returns to 5-month highs and renews them. A paradox?

Dynamics of European inflation

Perhaps the only reasonable explanation for what is happening is a tectonic shift in the US Treasury market. They are running ahead of the train—laying down expectations of a 160 bps cut in the federal funds rate in 2023–2024, contrary to the intention of the Fed to continue monetary restriction. Albeit at a slower pace.

Investor confidence is based on contradictions between Jerome Powell's speech and the minutes of the FOMC meeting. The Fed chairman argued that the rate peak would be higher than the Committee had predicted in September. However, only "various members" held this opinion in the minutes. The new term "various" does not make it clear whether this is the opinion of the majority or the minority. Possibly, this is Powell's wishful thinking. If so, then the US dollar should be sold.

At the heart of the Fed's change in outlook is the slowdown in inflation and the need for caution as monetary policy impacts the economy with a time lag.

Dynamics of inflation and inflation expectations in the USA

The events in China add fuel to the fire. Massive protests risk further slowing the economy, which encourages purchases of US Treasury bonds and reduces their yield. Goldman Sachs expects Chinese GDP to grow by a modest 4% in 2023. This figure is far from the last decade's average of 8.6%.

At the same time, the risks of a global recession are rising, putting even more pressure on US debt yields. If the US buckles under the impact of aggressive monetary tightening by the Fed, the Eurozone due to high gas prices, and China due to COVID-19, what is left to do but buy up safe haven assets? The main ones are no longer the US dollar but US bonds, the Japanese yen, the Swiss franc and gold.

Why the euro is feasting is unclear to the end. The US dollar is resisting against other currencies, with the exception of the safe haven assets. The "bulls" on EURUSD are getting bolder. They are determined to take the pair up to 1.05 and then to 1.06 as soon as possible. Will it succeed?

Technically, on the EURUSD daily chart, both the recovery of the upward trend and the formation of the Double Top reversal pattern can occur. Investors should keep a close eye on 1.045, where the upper boundary of the fair value is located. A fall below it is a reason to sell the euro.