USD: it all depends on inflation. Forecast as of 10.11.2022

What happened to EURUSD in early November? Bear market relief rally or downtrend reversal? US inflation data will help clarify the situation. Let’s discuss the topic and make up a trading plan.

Daily US dollar fundamental forecast

For the last few days, the state of the financial markets has been as if China has abandoned the zero patient strategy, the Republicans have taken over in Congress, and the US inflation rate has slowed down enough to force the Fed to restrict monetary policy less quickly. Two of the three assumptions will most likely not come true. If the growth rate of consumer prices exceeds the forecasts of Bloomberg experts, which happened over six of the last seven cases, the EURUSD rally will not begin.

The three factors listed above are components of improving global risk appetite. The faster China’s GDP grows, the easier the situation in the world economy. Investors perceive the political situation in the US as the lesser of two evils. It’s better than raising taxes or new damaging rules for business. Finally, the Fed’s slower monetary restriction hints at the end of the cycle, which is a growth driver for stocks.

Alas, the unconditional victory of the Republicans did not happen. Democrats are fighting desperately for a majority in the House of Representatives, not to mention the Senate. An increase in the number of COVID-19 cases in China to six-month highs reduces the risks of opening its economy. Under such conditions, a hawkish surprise from US inflation may cause a drop in stock indices and EURUSD.
According to the Bloomberg forecast, consumer prices slowed in October from 8.2% to 7.9%, and core inflation from 6.6% to 6.5%. However, the Fed will pay increased attention to the monthly dynamics of indicators, trying to ignore the base effect. +0.6% and +0.5% estimates are very high. They leave room for a 75 bps increase in the federal funds rate in December, despite the opposite position of the derivatives market. The US dollar will rise after the strong data release, as it did in most cases in 2022.

Maintaining inflation also means a higher peak rate for federal funds. According to CME derivatives, the rate will be in the range of 5-5.25%. However, Forex predicts 6%. They say that the Fed, in the face of consistently high prices and intentions to reduce inflationary expectations, should run ahead of the markets. According to this view, 5% will drop to 4%, and 6% will likely turn into 5% soon. A Fed rate of 6% means that 10-year Treasury yields will rise to around 4.6%, which will support the US dollar.

Daily EURUSD trading plan

An increase in inflation on a monthly basis in line with the forecast or higher will be a reason to sell EURUSD on a breakout of support at 0.995. A slowdown in indicators will contribute to the growth of the euro to $1.015.

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