Fundamental analysis

EUR/USD. Results of the week: the dollar did not lose, but did not win either

The euro-dollar pair is trading flat on Friday after the previous day’s sharp decline to 0.9960. EUR/USD bulls could not keep the price above the parity level, despite the European Central Bank’s 75-point rate hike and ECB President Christine Lagarde’s rather hawkish comments. The ECB has become a temporary ally of the euro, but traders have ignored this fact. Impulsively rising to the 1.0090 mark, the pair turned around and headed downward, following the US currency.

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By the way, the current situation serves as another confirmation that the euro is not capable of its own game. EUR/USD growth is possible only if the greenback weakens. Strengthening the single currency is optional, not a prerequisite. At the beginning of this week, a “perfect storm” formed: the dollar was losing its positions, while the euro was gaining momentum throughout the market. Thanks to a combination of these factors, the pair broke the 1.0000 mark for the first time since September 20. But as soon as the dollar bulls reminded themselves, the price impulsively declined to the area of the 99th figure. The euro failed to pick up the “falling banner”, once again confirming its role as a slave, not a leader.

The US dollar index updated a 5-week low on Thursday, reaching 109.36. However, on the same day, the index turned upward, reacting to the release of data on the growth of the American economy. According to the published report, the US economy recovered in the third quarter after a two-quarter decline (in the first quarter of 2022, it shrank by 1.6%, in the second – by 0.6%). In the period July-September, GDP increased by 2.6% with a growth forecast of 2.3%. The indicator was in positive territory for the first time this year, amid fears that the country is at risk of recession. The growth of consumer and government spending, as well as investments in fixed assets in the non-residential sector contributed to the improvement of the economic situation.

The report was an important trump card for dollar bulls, which have recently loosened their grip. Over the past two weeks, rumors have been actively circulating in the market that the Federal Reserve will reduce the pace of monetary policy tightening after the November meeting. The latest releases, which were in the red zone, also added fuel to the fire. In particular, the US index of business activity in the manufacturing sector collapsed to 49.9 points. This is the weakest result since July 2020. The index of business activity in the services sector fell to 46 points with a forecast of a decline to 49 points. The consumer confidence index also disappointed, which fell to 102 points. The index of manufacturing activity from the Fed Bank of Richmond was also in the red zone.

Amid such a series of negativity in the market, there was some confidence that in November the Fed will raise the interest rate by 75 basis points for the last time (within the current cycle). Further, the 5% indicative goal will be achieved in shorter steps – 50-point or even 25-point. For example, the probability of a 50-point rate hike following the December meeting is now 48%.

The report on US GDP growth made traders doubt that the members of the Fed will reduce the pace of interest rate hikes.

In my opinion, these doubts are justified, given the position of Fed Chairman Jerome Powell and most of his colleagues. Powell actually said that Americans will have to put up with the slowdown in economic growth, since “this is a sad price for reducing inflation.” At the same time, he has repeatedly stated that the pace of monetary policy tightening this year “will depend on incoming data,” primarily in the field of inflation. Take note that the core PCE price index, which is the preferred indicator of inflation for Fed members, rose in September to 5.1% in annual terms (in August, an increase to 4.9% was recorded).

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Thus, the dollar was caught between a rock and an anvil. On the one hand, there is a record increase in core inflation (the core CPI has reached a 40–year high), an increase in gasoline prices in the United States (amid the latest OPEC+ decision), foreshadowing an acceleration in the overall CPI and an increase in the PCE index. On the other hand, there are pessimistic forecasts regarding the slowdown of the American economy. According to most experts surveyed by The Wall Street Journal, 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.

Members of the Fed at the November meeting (the results of which we will learn next Thursday) will swing the pendulum in one direction or another. Either they will express concern about the economic downturn, hinting at a possible slowdown in the pace of monetary policy tightening, or they will again focus their attention on the dynamics of inflationary growth.

The Fed meeting is less than a week away. Consequently, the members of the Fed now observe a 10-day silence regime and do not speak publicly. In such an information vacuum, the EUR/USD pair is likely to circle around the parity level, moving away from the 1.0000 mark by 60-100 points. Given the influence of the so-called “Friday factor”, it is impractical and even risky to open trading positions now. The downward momentum of Thursday has exhausted itself, while EUR/USD bulls, apparently, are not able to organize a large-scale counteroffensive. Therefore, at the moment it is most expedient to take a wait-and-see attitude.

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


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