The euro/dollar pair overcame the parity level for the first time since September 20, demonstrating a powerful corrective impulse. For almost 5 weeks, buyers of EUR/USD repeatedly tried to approach the 1.0000 mark, but the northern impulse faded in the area of 0.9980-0.9990. This time, the stars have finally come together in the right way: the dollar is weakening while the euro is in high demand. In my opinion, this situation is temporary given the volatility of many fundamental factors. The US currency is losing ground amid unconfirmed rumors and assumptions about the Fed's further actions. However, if dollar bulls regain their strength, the euro will be unable to maintain its upward trend. Such a scenario is very, very likely.
The dollar is getting cheaper for two main reasons. First, the market has increased interest in risky assets. Second, rumors began to actively spread in the market that the Federal Reserve would slow the pace of monetary policy tightening at the end of this year. All other fundamental factors are, in one way or another, in the orbit of the above "main" causes.
At first glance, the fundamental picture is quite homogeneous – almost all information signals indicate the priority of EUR/USD longs. And yet, if we consider the current situation in more detail, then the picture is no longer so clear.
For example, the macroeconomic data published on Monday by China came out in the "green zone," exceeding the expectations of most experts. This release contributed to a decrease in anti-risk sentiment. China's GDP increased by 3.9% in the third quarter. On the one hand, the growth rate of the Chinese economy has accelerated, given the fact that in April-June this indicator grew by only 0.4%. But on the other hand, the published result showed a significant lag behind the target set by the Chinese government (5.5%). Such economic growth rates are the lowest for China in the last three decades.
Therefore, China cannot act as a reliable information driver here – the published release came out better than expected and played its role "at the moment." In the medium term, this fundamental factor will not support EUR/USD buyers.
The same can be said about the news from Wall Street. The stock market liked the corporate reporting season, as the revenues of several large companies turned out to be higher than expected. Key Wall Street indices ended Tuesday trading higher due to the strengthening of the consumer goods, raw materials, and technology sectors. But another point is interesting here. According to many experts, stock markets rushed higher primarily due to rumors that the Fed would soon loosen its grip and reduce the pace of monetary policy tightening. The logic of such assumptions is straightforward: since the Fed's hawkish policy harms the country's economy, the Fed may (or even be forced) reduce the scale of the rate hike after the November meeting.
Proponents of this scenario point to recent macroeconomic reports that are disappointing. For example, the US index of business activity in the manufacturing sector collapsed to 49.9 points (the weakest result since July 2020). The index of business activity in the services sector collapsed to 46 points, with a forecast of a decline to 49 points. The consumer confidence index also disappointed, which dropped to 102 points. The index of manufacturing activity from the Federal Reserve Bank of Richmond was also released in the red zone. According to S&P economists, the American economy will enter a state of recession in the 4th quarter of this year. The company has worsened its forecast of the dynamics of the country's economic development.
After the publication of the above reports, market participants revised their forecasts regarding the prospects for the December meeting. According to the CME FedWatch Tool, the probability of a 75-point rate increase in December is 47.9%. While the probability of implementing a 50-point scenario is 49.7%, the probability of an increase by 25 points is 2.4%. At the same time, last week, the probability of implementing a 75-point scenario at the December meeting was 77%.
Given such a sharp drop in sentiment, it is not at all surprising that the dollar was under strong pressure. The euro, in turn, received support due to lower gas prices (against the background of filling storage facilities in European countries by 80–90%).
Nevertheless, the market has somewhat rushed to conclusions regarding the slowdown in the pace of tightening of the Fed's monetary policy. The fact is that the relevant assumptions began to be voiced during the period of the "silence regime": 10 days before the meeting, members of the Federal Reserve do not speak publicly and do not voice their comments. Whereas earlier statements by the Fed representatives were exceptionally hawkish. Also here, we can recall the rhetoric of Jerome Powell, who stated that the US regulator would continue to raise interest rates and keep them at a high level "even if it harms households and businesses." The head of the Federal Reserve made it clear that Americans will have to put up with the slowdown in economic growth as "this is a sad price for reducing inflation."
As for inflation itself, some analysts point to the fact that the overall consumer price index is gradually declining. The structure of the overall CPI suggests that the slowdown in the growth rate of energy prices has contributed to gasoline prices, which have been declining for the third month in a row. This component increased in September by 19.8% y/y, while in August an increase of almost 24% y/y was recorded. But in light of OPEC's decision to reduce oil production by 2 million barrels per day since November, as well as against the background of the already begun process of gasoline price appreciation in the United States, it can be assumed that the overall consumer price index is unlikely to continue the downward trend in the coming months. While the core CPI does not seem to decline: both in September and in August, it showed an upward trend, eventually reaching a record high of 6.6%. This is the strongest growth rate of the indicator in the last 40 years.
Thus, the current northward surge of EUR/USD, which is primarily due to the weakening of the dollar, is, in my opinion, temporary. If the Fed members maintain an "ultra-hawkish" rate next week (which is quite likely), the house of cards of EUR/USD buyers will instantly collapse.
Therefore, it is advisable to consider a corrective price increase as a reason to open short positions. The first southern target is the 0.9950 mark, which corresponds to the Tenkan-sen line in the H4 timeframe. The main target is located one hundred points lower, at 0.9850. At this price point, the Bollinger Bands line on the daily chart coincides with the Tenkan-sen and Kijun-sen lines.
