The greenback suspended its offensive after almost a week-long march. The US dollar index approached the borders of the 96th figure (high since July 2020) and froze in place waiting for the next information impulse. Paired with the euro, the dollar also took a break. EUR/USD bulls were able to take advantage of the moment by organizing a small correction to the middle of the 13th figure.
This price behavior looks quite logical, especially after updating the 16-month low. The pair plunged for several days – rapidly and almost recoilless, accumulating the potential for a corrective rebound. Yesterday, the fuse of bearish sentiment dried up: after reaching the 1.1264 mark, traders recorded profits and retreated from the conquered frontiers. However, it is impossible to talk about a trend reversal in any case: the dollar's positions are too strong and the euro's positions are too weak. Therefore, when the corrective impulse fades, it is advisable for traders to go into sales again, focusing on the target levels of 1.1300 and 1.1264.
It is noteworthy that the US currency ignored several macroeconomic reports today, which turned out to be quite good. In particular, the Fed-Philadelphia manufacturing index jumped immediately to 39 points in November (with a forecast growth of up to 24 points). This is the best result since April of this year. We were also pleased with the weekly data on the labor market. The number of initial applications for unemployment benefits increased by 268,000 over the past week. This indicator has been consistently decreasing for the past seven weeks. And although the downward trend has been smoother in the last three weeks, the trend itself cannot help but please.
And here it is necessary to recall that in recent weeks, US reports have been exceptionally positive. Nonfarm, data on retail sales, industrial production and, of course, inflation were released in the green zone. Strong releases spurred interest in the dollar, which rose in price due to increased hawkish expectations. Comments by some current and former members of the Federal Reserve only fueled these expectations. James Bullard, Loretta Mester, Charles Evans, in particular, spoke in favor of raising the interest rate. According to the Fed's point forecast, which was published in September, 9 members of the Committee admit a tightening of monetary policy as early as 2022. Former representatives of the US central bank, including William Dudley and Jeffrey Lacker, joined the hawk wing of the Fed. In particular, Dudley expressed confidence that the Fed will have to raise the interest rate next year - "and even at a higher rate than the market currently assumes."
However, the market is already slowly revising its forecasts, shifting the focus to the implementation of a more hawkish scenario. For example, the currency strategists of the international financial conglomerate Citigroup said that the Fed will start raising the rate "earlier than the previously designated deadline and at a faster pace." According to their calculations, the central bank will hold 9 rounds of rate increases in the period 2022-2025. JPMorgan economists, in turn, also expressed confidence that the Fed will begin to tighten its policy in the middle of next year. In their opinion, the first round of rate hikes will take place in September, the second in December. A similar position was voiced by representatives of the conglomerate Goldman Sachs. They are also confident that the central bank will raise the rate twice in 2022. In general, according to 29 out of 37 economists polled by Reuters, the risk that the Fed may raise interest rates "earlier than the declared deadline" (that is, earlier than 2023) has "increased significantly recently."
Even representatives of the centrist wing of the Fed were concerned about the jump in inflation. In particular, today the corresponding rhetoric was voiced by the head of the Federal Reserve Bank of New York, John Williams. He said that the central bank notes a strong increase in inflation, "even taking into account the effect of the low base of last year." He also noted that long-term inflation expectations "have risen again."
In the wake of hawkish expectations, the dollar paired with the euro strengthened by almost 300 points in less than five trading days. There are no grounds for a reversal of the downward trend: the issue of raising the Fed rate next summer is still on the agenda. The European currency still does not have counter arguments to strengthen its position in the market. ECB representatives continue to insist on maintaining a soft monetary policy - both this year and next. In particular, today the chief economist of the central bank, Philip Lane, said that he does not expect inflation expectations to rise above the ECB's target level.
In other words, the dollar only took a pause, allowing the EUR/USD bulls to organize a correction. The ceiling of the upward pullback, in my opinion, is the 1.1410 mark - this is the upper line of the Bollinger Bands indicator on the four-hour chart. As soon as the corrective impulse begins to fade (most likely, this will happen after buyers fail to settle above the specified resistance level), it is advisable to consider short positions for the pair. The first goal of the downward movement is the psychologically important mark of 1.1300. The main target is located just below - 1.1264 (the price low of the year).
