After a significant slowdown in US inflation, it became clear that only the Fed can save the dollar. To do this, Jerome Powell will have to make a titanic effort. Let’s discuss this topic and make up a trading plan for EURUSD.
Daily US Dollar fundamental forecast
The fight against global inflation is coming to an end. US consumer prices in November slowed from 7.7% to 7.1%, after a June peak of 9.1%. The growth rate of core inflation decreased from 6.3% to 6% YoY and by 0.2% MoM. Even the SPPI index, as important as Jerome Powell sees it, excluding energy services and rents, grew by only 0.1% in November after +0.4% in October and +0.8% MoM in September. Data turned out to be the best in at least 12 months. Excellent conditions for the growth of stock indices and EURUSD.
Inflation was the biggest fear for financial markets in 2022. At the end of the year, they got rid of this fear. Now Jerome Powell needs to try very hard to convince investors that in the near future FOMC officials will not stop fighting high prices. That the dovish reversal, which the markets have been dreaming about throughout the second half of 2022, will soon come.
Such a serious slowdown in inflation was a pleasant surprise for US stock indexes and risky assets. The yield of US Treasury bonds against the background of exiting record short treasuries trades since 2020 fell, moving in the opposite direction from the price, the S&P 500 soared, and the EURUSD rose to six-month highs. CME derivatives increased the chances of federal funds rate growth by 25 bps in February from 35% to 56%. They expect that the peak cost of borrowing will be 4.85% by May (not 5%, as predicted earlier). By the end of 2023, the rate will decrease by 50 bps.
The slower the Fed moves, the faster it will stop. It is quite possible that next year the central bank will take a pause at one or more FOMC meetings, or even complete monetary tightening faster than investors expect. As a result, the US dollar will lose two of its three advantages, namely aggressive monetary restriction and high demand for safe haven assets.
It is too early to talk about a victory over inflation based on one or two reports. In December, consumer prices may surprise again, so the Fed’s dovish stance is clearly out of place now. It will further weaken financial conditions, reducing the chances of raising the federal funds rate by 50 bps to almost zero at the December 13-14 meeting. FOMC forecasts will show borrowing costs peaking at 4.9%, while Jerome Powell will not signal their growth by 25 bps in February and will say that the Fed’s work has not yet been done.
Daily EURUSD trading plan
Such a moderately hawkish stance is unlikely to contribute to the USD recovery. Use minor declines of EURUSD to supports at 1.061 and 1.057, followed by a rebound from them, to add up to long trades formed due to a pleasant surprise from inflation.