The EUR/USD pair is circling around the parity level ahead of the Federal Reserve's September meeting, reflecting the uncertainty of both bulls and bears. The price shows increased volatility, but de facto traders are still at a crossroads. In order to develop the downward trend, they need to settle below the 0.9950 target (the lower line of the Bollinger Bands on the four-hour chart), in order to then go to the base of the 99th figure. While the bulls of the pair need to rise above the 1.0080 mark (the upper line of the Bollinger Bands on the D1 timeframe) to indicate the priority of long positions within the corrective growth. As you can see, despite the 100-point intraday volatility, neither bulls and bears managed to fulfill the "minimum program". The Fed acts as a deterrent for both sides, which will announce the results of its next meeting on Wednesday.
In general, the result of the September meeting is a predictable scenario. The market is almost 100% certain that the central bank will raise the interest rate by 75 basis points on Wednesday. This is the basic scenario, which is the most discussed and widely expected in the expert environment. It should be noted here that just last week a more hawkish scenario was discussed on the market. So, after the release of data on the growth of the consumer price index, the probability of a rate hike by 100 points immediately increased to 38%.
Hawkish expectations have increased, and with them the dollar has strengthened its position – against the euro, the greenback has risen by more than a hundred points. But a week later, emotions subsided, the market cooled down somewhat: to date, the probability of implementing a 100-point scenario has decreased to 19%. In other words, raising the rate by 75 points is actually a settled issue. And in many ways, the market has already played out this scenario. Therefore, special attention will be focused on the rhetoric of the accompanying statement and (especially) on the rhetoric of Fed Chairman Jerome Powell. There really can be surprises here.
Let me remind you that the latest inflation reports were published during the so–called "silence regime" - this is a 10-day period ahead of the Fed meeting, during which Committee members do not have the right to publicly assess/comment on current macroeconomic events or voice forecasts regarding possible outcomes of the meeting. In the context of this circumstance, traders are interested in two points: 1) how the Fed will assess the current pace of monetary policy tightening, taking into account strong inflation reports, 2) how radically the central bank will revise its forecasts.
It is obvious that the forecast estimates that were announced at the beginning of the summer have lost their relevance at the moment. It is also obvious that the peak of the federal funds rate in the current cycle will be higher relative to earlier forecasts. The revision of this benchmark will have a strong impact on the greenback. In particular, according to Commerzbank's currency strategists, it is this factor that can put the strongest pressure on EUR/USD if the expected peak in rates is increased. In turn, Rabobank analysts have already revised their own forecasts last week – in their opinion, the upper limit of the target range will reach the target of 5.00%, and not 4.50%, as previously indicated in the long-term forecasts.
The tone of Powell's rhetoric will also be of crucial importance. In my opinion, Powell will at least repeat the main theses he voiced at the economic symposium in Jackson Hole. At the end of August, the head of the Fed surprised the markets with his hawkish and even uncompromising attitude. In particular, he made it clear unequivocally: the Fed will not look back at a possible slowdown in the labor market and other side effects – the central bank will continue to raise the interest rate "at the necessary pace", solving the problem of high inflation.
By the way, the latest Non-farm allows the Fed to at least keep the set pace, and if necessary, to strengthen the "degree of aggressiveness". Despite a slight increase in the unemployment rate (up to 3.7%), the indicator of the increase in the number of people employed in the non-agricultural sector came out in the green zone (as well as the component of growth in the private sector of the economy).
While the consumer price index behaves like an undefeated bull at a bullfight. Despite all the actions taken, the "matador" in the form of the Fed loses the duel.
The latest release of data on the growth of inflation in the US allows the US central bank to tighten its rhetoric. Let me remind you that the overall CPI in the US came out at around 8.3% y/y with a slowdown forecast to 8.1% (the indicator continues to be in the region of 40-year highs). The benchmark index also shot up, rising to 6.3%. The largest contribution to the growth of inflation was made by housing prices, food and medical care. It is noteworthy that the increase in food prices (almost 12%) was the highest since 1979.
Thus, given the prevailing fundamental background, it can be assumed that the Fed will raise the interest rate by 75 basis points tomorrow. At the same time, the tone of the accompanying statement will be hawkish, as will the rhetoric of Powell. It is likely that following the results of the September meeting, the probability of a 75-point rate hike will significantly increase both at the next (November) meeting and at the last one this year (in December).
From this we can conclude that longs for the EUR/USD pair are risky. The tactic of opening short positions on upward pullbacks is still the most appropriate. In the medium term, the goals remain the same, and they are all on the downside – these are the 0.9950 and 0.9900 marks.
