The EUR/USD pair is going on with its plunge, breaking through every support level along the way. Currently, the instrument is attempting to consolidate below 1.0530, which corresponds to the lower line of the Bollinger Bands indicator on the 1-month timeframe. Once this target is breached, this would pave the way toward the next support level at 1.0450 (the Kijun-sen line on the monthly chart). From there, it's just 450 pips away from parity.
Given the strength of the downward momentum, reaching the 1.0000 target seems only a matter of time. All in all, since the end of September, the EUR/USD pair has slumped by nearly 700 pips (400 of which were lost in just the past two weeks). Before Trump's election, the pair's fundamental background was relatively mixed, allowing EUR/USD buyers to mount substantial corrective rallies. However, the current fundamental picture overwhelmingly favors the greenback. The euro is now trailing the quoted currency, weighed down by the clouds gathering over Brussels.
The dollar's strength stems from two main factors. The first is Trump's administration policy as he assembles his team in preparation to assume the presidency. The second factor is US inflation.
The October CPI report, published yesterday, effectively supported the greenback by showing an acceleration or stabilization of annual inflation rates. The headline consumer price index came in at 2.6% year-over-year, in line with most experts' forecasts. This figure had declined for six consecutive months but accelerated in October for the first time since March this year. The core CPI, excluding food and energy prices, was at 3.3% (also meeting analysts' expectations), consistent with September's figure. The report's structure indicated a 2% rise in natural gas prices, and the rate of decline in energy prices in the US slowed last month: prices dropped by 4.9% year-over-year, compared to a 6.8% drop in September.
In response to this release, the US dollar index settled at around 106, reaching a seven-month high. Today, the index continued its uptrend, reaching a new yearly high of 106.87 (the highest DXY level since October 2023). Meanwhile, the EUR/USD pair reached a new 13-month low.
Interestingly, the inflation report cemented market confidence that the Federal Reserve would cut the interest rate by 25 basis points at its December meeting. Before the report, this scenario had a 64% probability, but after the release, the chances rose to 83% (according to the CME FedWatch tool). However, the probability of a pause at the following January meeting has also risen, approaching nearly 70%.
These conclusions likely stem from the fact that the inflation report fully aligned with the consensus, and current levels allow the Federal Reserve another rate cut in December. However, a 25-point cut is partially priced in already (considering Powell's rhetoric at the November meeting). So, the increased likelihood of monetary easing at the final meeting in 2024 hasn't negatively impacted the US currency. This is because, alongside confidence in a December cut, there's growing certainty in the market that next year, the easing process will either slow down or stop entirely (a rate hike scenario is not yet on the table).
In other words, the market acknowledges that the October CPI growth report allows the Fed to cut interest rates in December. However, traders cannot ignore the actual acceleration of headline inflation, the stagnation of core inflation, and the rising inflation risks associated with the upcoming Trumponomics 2.0.
In this context, today's speech by Fed Chairman Jerome Powell, who will be participating in an economic conference in Dallas at 3:00 PM Eastern Time, will be of particular importance. A Q&A session will follow his speech, promising valuable insights. If Powell once again mentions a potential pause in upcoming meetings, the US dollar will receive additional support, and the EUR/USD pair may test the 1.0450 target.
Overall, the fundamental backdrop continues to favor the safe-haven dollar. Trump has appointed Florida "hawks" Ulrich and Rubio to key foreign policy positions, signaling a possible trade war with China, and the House of Representatives has officially come under Republican control (with a majority of 218/208 after vote counting). Furthermore, overall US inflation has accelerated while core inflation has stalled. In these conditions, only short positions on the EUR/USD pair remain viable due to the dominant status of the greenback.
Technically, the EUR/USD pair is positioned on the lower line of the Bollinger Bands on all major timeframes (H4 and above) and below all lines of the Ichimoku indicator, signaling a priority for short positions. The nearest target is 1.0450 (the Kijun-sen line on the 1-month timeframe).
