The dollar continues to recover its positions lost last week after the publication of inflation indicators that indicated an acceleration of inflation in the United States.
As of this writing, DXY futures are trading near 95.33, up 72 points from last week's low.
Now investors seem to be seriously counting on a more aggressive monetary policy of the Fed, especially since statements have begun to appear from some members of the leadership of the U.S. central bank, indicating a tendency to a tougher policy.
Last week, the head of the St. Louis Fed, James Bullard, said that in order to curb high inflation, it will now be necessary to raise interest rates 4 times this year, and not 3, as planned at the December meeting of the Fed.
"We want to bring inflation under control in a way that does not disrupt the real economy, but we are also firm in our desire to get inflation to return to 2% over the medium term," Bullard said.
The Bureau of Labor Statistics reported last week that consumer prices rose by 7.0% in December (in annual terms) after rising by 6.8% in November. This corresponds to the highs of almost 40 years ago. Core inflation (excluding food and energy products) increased by 5.5% in December (in annual terms).
Thus, inflation has been above the Fed's 2% target for several months in a row, and its growth at such a pace makes Fed officials take this fact more seriously, as the risk grows that they may be late with measures to tighten monetary policy.
It's also worth looking at the performance of the major U.S. stock indices, which have been declining since the beginning of this year, and that decline, judging by the chart of the S&P 500 broad market index, is accelerating.
Thus, we should count on further strengthening of the dollar, unless, of course, the leaders of the Fed again begin to receive calming signals about the temporality of high inflation and the possibility of a wait-and-see attitude. But the facts so far tell a different story, and investors are putting the Fed's tougher stance on monetary policy into quotes.
Meanwhile, the British pound is now showing the best resistance to the dollar, while the GBP/USD pair, unlike other major dollar pairs, remains in the bull market zone, trading above the key long-term support levels of 1.3390, 1.3590.
Earlier today, the U.K. labor market saw very positive data. According to the Office of National Statistics (ONS), the number of jobs in the U.K. increased by 184,000 in December, and unemployment (in the period from September to November 2021) was at 4.1% (against the forecast and the previous value of 4.2%). The number of applications for unemployment benefits decreased by 43,300 in December, and the average hourly earnings in September-November increased by 4.2% (in annual terms).
Thus, the spread of the omicron strain of coronavirus could not significantly weaken the country's labor market: the number of employed U.K. citizens has increased, and the unemployment rate continues to decline.
However, despite these positive macro statistics, the GBP/USD failed to develop an upward trend, retreating from the local high of 1.3745 reached last week.
Although it is still too early to talk about victory over coronavirus in the U.K. (the number of new infections continues to grow), market participants are counting on the Bank of England to raise interest rates again, as it did in the middle of last month, raising it by 0.15 % to the current level of 0.25%, anticipating a faster rise in inflation in the country.
The next meeting of the BoE, devoted to the issues of monetary policy, will be held on February 3rd. In this regard, market participants will carefully study the macro statistics coming from the U.K., and it will appear tomorrow.
Short-term market expectations and trading recommendations
The CPI index is a key indicator of inflation. The main movement of the pound in the foreign exchange market, as well as the index of the London stock exchange FTSE100, will take place around its publication.
In the previous reporting month (November), consumer inflation increased by +5.1% (in annual terms). The forecast for December is +5.2% (in annual terms). The data indicate rising inflation, which is likely to increase pressure on the management of the Bank of England towards tightening monetary policy, and this is a positive factor for the pound.
The weakening of the pound may provoke the CPI indicator below the forecast/previous value, since a decrease in inflation will force the BoE to take a wait-and-see position and adhere to a soft monetary policy for the time being.
And yet, there is one alarming moment for holding long positions and the upward dynamics of the GBP/USD. On the 1-hour chart of GBP/USD, the price broke the important short-term support at 1.3628 (200-period moving average). This is the first signal to open short positions on GBP/USD. A break of the key support level at 1.3590 (the 200-period moving average on the daily chart) will be a confirmation signal. A break of the support level at 1.3390 (200-period moving average on the weekly chart) will bring GBP/USD back into the bear market.
An alternative scenario will be associated with the resumption of the upward dynamics of the GBP/USD. The breakdown of the local resistance level 1.3660 will be the first signal for the implementation of this scenario with an intermediate target at the local resistance level near 1.3745.
Support levels: 1.3628, 1.3590, 1.3500, 1.3445, 1.3390, 1.3300, 1.3210, 1.3160, 1.3000, 1.2865, 1.2685
Resistance levels: 1.3660, 1.3700, 1.3745, 1.3832, 1.3900, 1.3970, 1.4000
Trading recommendations
Sell Stop 1.3610. Stop-Loss 1.3670. Take-Profit 1.3590, 1.3500, 1.3445, 1.3390, 1.3300, 1.3210, 1.3160, 1.3000, 1.2865, 1.2685
Buy Stop 1.3670. Stop-Loss 1.3610. Take-Profit 1.3700, 1.3745, 1.3832, 1.3900, 1.3970, 1.4000
