Last Friday, Fed Chairman Powell said that "supply constraints and higher inflation are likely to last longer than previously expected and continue next year." It cannot be said that for the markets, such a statement was some kind of revelation since the temporary nature of inflation has long been questioned, but the probability of a rate hike remains low, because the labor market, which Powell specifically focused on, is still 5 million jobs lower than before the "pandemic", and this argument cannot be ignored.
The high level of inflation is also expected by US Treasury Secretary Janet Yellen, who said on October 24 that "on a 12-month basis, the inflation rate will remain high next year."
The cumulative long position on the US dollar has slightly fallen again. This is the second reduction in a row, but the accumulated +22.29 billion dollars are still significant, and a slight downward correction does not yet imply a downward reversal of the dollar.
However, this slight adjustment contributed to the strengthening of sentiment against defensive currencies – the franc lost 639 million, and the yen lost 2.8 billion at all. The yen's net short position rose to -11.227 billion. Meanwhile, commodity currencies and the euro, which have joined them, continue to be in demand. Judging by the dynamics in the futures market, this week will not bring any special surprises. We should expect the growth of crosses against the yen, such as CAD/JPY or AUD/JPY. The pressure on the US dollar is unlikely to be deep.
EUR/USD
On October 28, the ECB meeting will be held. The markets are not expecting any surprises, focusing on the explanations of ECB Chairman Lagarde, who reported earlier that a decision on the PEPP and QE programs will be made at a meeting in December. For now, the ECB has the opportunity to pause, since the growth of inflation in the eurozone remains slightly from the growth rate in the United States, although the discussion about the temporary or long-term nature of inflation is gaining impulse.
According to the CFTC report, the euro managed to slightly win back its losses. The net-short position decreased by 891 million to -1.761 million, and the estimated price makes an attempt to rise, but remains significantly below the long-term average. This means that an attempt to grow should be considered corrective for now and wait for an opportunity to sell from a more convenient level.
The EUR/USD pair is trading in the resistance zone of 1.1660/80. It may rise to the level of 1.1720 before the ECB meeting, but since the result of the meeting is not expected to bring any bullish surprises, the decline is likely to continue this Friday. The target is still the level of 1.1500.
GBP/USD
The pound's volume of long contracts rose by 1.157 billion during the reporting week, reflecting growing concerns about the likelihood that the Bank of England will raise the rate at the next meeting as part of the fight against inflation. The estimated price goes up.
The pressure on the pound may decrease slightly, as the retail sales report published on Friday unexpectedly showed a 0.2% reduction in demand instead of the expected growth, which may somewhat indirectly lower inflation expectations.
The BoE's new chief economist, Pill, said last week that the BoE is considering raising rates to lower inflation expectations and that he does not rule out an inflation rate of 5% at the beginning of next year. The next meeting of the Bank of England will be held on November 4. Surprises are not excluded, and the closer the meeting date is, the more likely it is that the volatility of the pound will increase.
As expected, the GBP/USD pair tested the upper border of the channel, and a slight pullback is more likely associated with consolidation ahead of a new wave of growth. The nearest target is the resistance zone of 1.3910/30, followed by 1.3980 / 4000.
