Dollar changed focus. Forecast as of 11.05.2023

After strong fluctuations caused by the release of US inflation data, EURUSD froze in place. Neither the supporters of the Fed’s dovish reversal in 2023 nor their opponents received additional benefits. Let’s discuss this topic and make up a trading plan.

Monthly US dollar fundamental forecast

How quickly the situation in Forex is changing! A few months ago, the release of US inflation data attracted the attention of financial markets. Now, investors have switched to other issues, including economic growth, the banking crisis, and the debt ceiling. As a result, after strong fluctuations, EURUSD stopped moving in anticipation of the PPI release.

Consumer prices in the US fell below 5% in April for the first time in two years, which is significantly less than the peak of 9.1% in June 2022. This is further evidence of the end of the Fed’s tightening cycle, which is bad news for the greenback. CME derivatives reduced the possibility of a federal funds rate hike in June from 21% to 8.5% and raised the chances of a dovish reversal to 36% in July and 72% in September. Treasury yields fell, which allowed EURUSD to return above 1.1 for a while.

As expected, the successful period for the bulls turned out to be short-lived. Core inflation in the US remains high at 5.5%, and the acceleration of monthly CPI and Core CPI dynamics suggests that the high prices have not yet been curbed.

The muted market reaction is due to the fact that everyone is used to high inflation. At the end of 2022, every fifth American polled by Gallup called it the most acute problem, but now the share has dropped to 9%. The Fed also reacts quite calmly to CPI reports. Unlike the banking crisis, central bank officials understand how monetary policy affects consumer prices. When the Fed is calm, so are investors.

I don’t think it’s good. If Americans get used to high inflation, it will last long. This will allow the Fed to keep the federal funds rate at or slightly above 5.25% for an extended period.

Thus, the release of CPI data will not have much effect on the balance of power in the market. Participants will continue to weigh the possibility of lowering the federal funds rate in July and September. If the chances fall against the backdrop of strong US data, the dollar will rise and vice versa. As a result, while the Fed sticks to data dependency policy, the EURUSD pair risks entering a medium-term consolidation.

Its dynamics will be affected by the echo of the banking crisis and the debt ceiling issue. Problems with the borrowing ceiling hold back EURUSD bears, limiting the correction potential. If the pair does not get out of the predicament, it will unlikely decline below 1.08. At the same time, the euro is not strong enough to restore the uptrend.

Monthly EURUSD trading plan

In the next two months, EURUSD will most likely consolidate in the range of 1.08-1.12. Focus on bi-directional trading with moderate targets.

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