The beginning of November was not set for the dollar bulls: the greenback sank significantly throughout the market, amid a slowdown in inflationary growth in the US and dovish signals from the Federal Reserve.
Representatives of the US central bank represented by Mary Daly, Patrick Harker and Esther George hinted that the Fed will slow down the pace of monetary tightening at the December meeting. Previously, this issue was in limbo - for example, some analysts focused more on February. More distant dates were not excluded, provided that inflation continues to show spasmodic growth. But the report on the growth of the consumer price index in the US, published last week, dotted all the i's. According to the CME FedWatch Tool, there is an 80% chance of a 50-point Fed rate hike at the December meeting.
Many currency market experts, and most journalists, focused their attention on this aspect, due to which the dollar was under significant pressure. But if we consider the situation in the context of the results of the November meeting, we can come to an obvious conclusion: only the pace of tightening monetary policy is slowing down. While the upper bar of the current cycle remains (at least) at the 5% level, this target has not been questioned, even in a hypothetical way. No one is talking about a possible pause, and even more so, none of the Fed members does not allow the option of lowering the rate in the foreseeable future. On the contrary, Fed Chairman Jerome Powell, following the latest statement, once again stated that the central bank will tighten monetary policy and keep rates high "even when inflation in the US shows signs of slowing down."
All these accents are in favor of the dollar. Yes, on the one hand, the speed of achieving the goal will decrease, but the goal itself (for now) remains in its original place. If this message is voiced in one form or another by representatives of the Fed, the dollar will receive significant support. So, on Monday Lael Brainard will announce her position, on Tuesday - Lisa Cook and Michael Barr, on Wednesday - John Williams and Christopher Waller, on Thursday - Michelle Bowman, Loretta Mester and Philip Jefferson.
Dollar bulls will be closely watching how all of the Fed representatives will place accents in their rhetoric. If they maintain a hawkish stance (primarily relative to the upper bar of the current monetary tightening cycle), the greenback may partially regain lost ground. In this case, EUR/USD bulls will definitely not stay within the third figure.
Also, the dollar will react to the general market sentiment amid the G20 summit. This is a major geopolitical event. Especially since US President Joe Biden and Chinese President Xi Jinping will meet on the sidelines of the summit. The White House has already stated that the meeting of the presidents "is unlikely to bring concrete results." No joint announcements are expected either. However, many analysts are still confident that these negotiations can stabilize relations between the US and China. According to White House national security adviser Jake Sullivan, Biden will say in the upcoming talks that Washington is ready to work together with Beijing in those areas "where the interests of the two countries coincide." If, following the meeting, the parties exchange such complementary statements (and even more so if there is a joint statement), interest in risky assets in the markets will increase. But if the rhetoric of China and the United States is confrontational, then the dollar will become the beneficiary of the current situation.
The euro, in turn, will react to the rhetoric of the European Central Bank, and above all ECB President Christine Lagarde. She can comment on the very gloomy forecast of the European Commission, which was published on Friday. According to the EC estimates, the main European countries are already entering recession. According to economists of the department, the economy of the EU and the euro area will contract in the fourth quarter of 2022 and the first quarter of 2023, that is, Europe is already entering a technical recession. At the same time, price growth will average 8.5% in 2022 and 6.1% in 2023. Let me remind you that in October the consumer price index in the euro area reached a historic high (10.7%).
The soft tone of the rhetoric of the ECB members in the light of the published forecast of the ECB may put strong pressure on the EUR/USD pair. Moreover, the first such signals have already sounded. In particular, Mario Centeno, a member of the Board of Governors of the ECB, said in early November that the central bank had already implemented most of the necessary rate hikes to curb inflation in the eurozone. Earlier, Lagarde also spoke about the time frame for this process - according to her, the central bank will raise rates in several meetings - "from two to five." If ECB officials become more vehement about the side effects of monetary tightening next week, the euro will come under intense pressure.
In general, in my opinion, the EUR/USD pair will stabilize in the near future: bulls are unlikely to keep the price in the area of the 3rd figure, while bears are unlikely to pull the pair below the parity level. In the medium term, a flat is possible in the range of 1.0100-1.0200.
