Fundamental analysis

EUR/USD. Preview of the week. Fed, Nonfarm and European Inflation

The euro-dollar pair ended the last trading week at 0.9965 – so to speak, in “neutral territory”. Bulls on EUR/USD were unable to settle above the parity level, while bears were unable to develop a downward momentum to return to the 98-97 figure area. As a result, the parties stopped around the 1.0000 mark and dispersed to the corners of the ring. At the same time, there is no doubt that traders will come together again next week.

The Federal Reserve will act as the arbiter of this confrontation. The US central bank will determine the winner: either the dollar will collapse throughout the market (and the EUR/USD pair will not be an exception here), or dollar bulls will organize another rally.

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The Fed will announce the results of its next meeting on November 2. On the one hand, the results of this meeting are predictable. The probability of a 75-point rate hike is now estimated by the market at 82%, according to the CME FedWatch Tool. The main intrigue of the November meeting lies in the further pace of tightening of the Fed’s monetary policy. Again, if we focus on the CME data, the probability of a 75-point rate hike in December is only 43.4%. Whereas the probability of implementing a 50-point scenario is estimated at 48.2%. A 25-point hike is also not excluded, although this scenario is unlikely (8.4%).

Rumors that the Fed will slow down the pace of monetary policy tightening (after the November meeting) especially intensified last week, when the so-called “silence mode” was already in effect (for 10 days before the meeting, Fed members cannot voice comments in the public plane). An interesting situation has developed: amid the “forced silence” of the representatives of the Fed, weak macroeconomic reports were published in America, indicating a slowdown in economic growth. At the same time, it became known that the volume of US GDP in the third quarter increased by 2.6%, after a two-quarter decline in the first half of 2022.

Now the Fed members will have to resolve this. Actually, there are only two scenarios: either the Fed expresses its concern about the “side effects” of aggressive tightening of monetary policy (hinting at a decrease in the rate of rate hikes in December and beyond), or the central bank again focuses on inflation, thereby confirming its intention to raise the interest rate at an aggressive pace. Many factors speak in favor of the second, hawkish scenario. Among them is the corresponding position of Fed Chairman Jerome Powell and the growth of inflation indicators (core CPI, base PCE). On the side of the conditionally dovish scenario, there are gloomy prospects for the American economy. According to many experts, US GDP growth will slow down in the coming months, as consumers and businesses continue to cut spending in the face of rising interest rates and uncertainty.

On Wednesday we will find out which way the scales will tilt. In my opinion, the Fed will maintain its hawkish attitude, after which the dollar will strengthen its position throughout the market. Powell has repeatedly stated that the fight against high inflation is the number one task for the Fed. Similar statements were made by many of his colleagues, including those who have the right to vote in the Committee.

In general, the economic calendar of the upcoming week is full of events. For example, key data on inflation growth in the eurozone will be published on Monday. According to most analysts, the overall consumer price index in October will jump to 10.2%, the core CPI – to 5.1%. However, given the results of the October ECB meeting (which were announced last Thursday), this release will have a limited impact on the EUR/USD pair.

On Tuesday, traders will focus on the ISM manufacturing index, which should fall to the 50.0 mark. If it falls below the 50-point value, the dollar will be under significant pressure.

On Wednesday, as mentioned above, the Fed will announce the results of its November meeting. Also on this day, the ADP agency will publish a report on the state of the labor market in the United States. This release serves as a kind of “petrel” ahead of the release of Nonfarm, which will be published a day later, on November 4.

On Thursday, we should pay attention to the dynamics of the index of business activity in the US services sector from the ISM Institute. Negative dynamics is also expected here (a decrease from 56 points to 54).

And finally, on Friday, Nonfarm will be the central release of the day. According to preliminary forecasts, the unemployment rate will increase slightly in October (from 3.5% to 3.6%), and the number of people employed in the non-agricultural sector will grow by 200,000. The average hourly wage should slow down to 4.7% (in annual terms).

However, all of the above releases, despite their significance, will play a secondary role for the EUR/USD pair (perhaps, except for Non-Farms). The tone of trading will be set by the Fed.

If the US central bank refutes (explicitly or covertly) rumors about a slowdown in the pace of monetary policy tightening, EUR/USD bears will be able to mark at least 0.9830. At this price point, the average line of the Bollinger Bands indicator coincides with the Kijun-sen line and the lower boundary of the Kumo cloud on the daily chart. With a high degree of probability, bears will push through this level of support and will be designated in the area of the 97th figure. But if the dovish rumors are really confirmed, bulls will again try to gain a foothold above the parity level. The key resistance level here will be the 1.0060 mark – this is the upper line of the Bollinger Bands on the same timeframe.

The material has been provided by InstaForex Company – www.instaforex.com


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