empty
12.08.2023 12:23 AM
The dollar chose the right path

Everyone got what they wanted. The Federal Reserve (Fed) has seen a confident move of inflation towards the 2% target, while the White House enjoys a robust economy. It feels as though Americans are living in paradise. However, such an ideal cannot last! A strong economy leads to high inflation, while stagnating consumer prices indicate a slowing GDP. Sooner or later, these processes will come into play. The question is, which will happen faster? And the answer to this is crucial for EUR/USD.

The latest CPI report further confirmed the disinflation in the U.S. Consumer prices grew by 3.2% year-on-year, less than what Bloomberg experts anticipated. Core inflation also fell short of the annual consensus forecast. Its 0.2% month-on-month increase for the second consecutive month marked the worst performance in two years. Can the Fed now confidently conclude its monetary tightening cycle? But then, why did markets react so strangely? After a logical rally, EUR/USD sharply dropped and closed below 1.1.

U.S. Inflation Dynamics

This image is no longer relevant

Investors are simply uncertain about the Fed's next move. The central bank itself is in uncharted waters. Never in post-war American history has it paid so little for monetary restriction. Unemployment isn't increasing, although it should have! Meanwhile, disinflation is in full swing!

However, secondary indicators suggest that in the near future, we shouldn't expect as sharp a drop in the pace of consumer price growth as we saw this summer. Firstly, average wages are not slowing. Secondly, price drops in real estate and certain products, such as used cars, might trigger the price increase of other goods. At the very least, the Fed will maintain the federal funds rate flat until March 2024. They might even increase it once more. It's premature to expect a dovish turn from them.

U.S. Average Wage Dynamics

This image is no longer relevant

What's next? Two scenarios. Either U.S. macro statistics will drastically worsen, increasing recession risks and prompting the Federal Reserve to cut rates. Or inflation will accelerate, and borrowing costs will start to rise after a September pause. In my opinion, the latter scenario is more likely. Currently, the markets are in a Goldilocks mode, where consumer price growth rates decrease, while GDP expands at a moderate pace. This mode leads to relaxed financial conditions, further stimulating the economy.

This image is no longer relevant

Thus, the chances of a repeat of the 1970s scenario – where inflation began to decrease, the Fed stopped hiking rates, followed by a new CPI peak – are quite high. The central bank will not repeat past mistakes, so EUR/USD "bears" can rest easy. Borrowing costs will remain at their current levels or begin to rise, but not decrease. This is a favorable environment for the U.S. dollar.

Technically, the formation of a pin bar with a long upper shadow on the EUR/USD daily chart allows placing a pending sell order for the pair at the 1.0965 level.

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2025
Select timeframe
5
min
15
min
30
min
1
hour
4
hours
1
day
1
week
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

GBP/JPY. Analysis and Forecast

The GBP/JPY pair is retreating from the psychological level of 190.00, or a two-week high reached earlier today. Following disappointing UK PMI data, selling pressure has intensified, pulling spot prices

Irina Yanina 18:16 2025-04-23 UTC+2

Market walks through minefield

If the market can rally this much on hints from Treasury Secretary Scott Bessent about de-escalation in the trade conflict with China, imagine how high the S&P 500 could jump

Marek Petkovich 12:35 2025-04-23 UTC+2

The Likelihood of a Euro Reversal to the South Is Increasing

As expected, the ECB cut all key interest rates by a quarter-point, bringing the deposit rate down to 2.25%. At this meeting, no new staff projections were released, and given

Kuvat Raharjo 12:01 2025-04-23 UTC+2

Markets Await a Massive Rally if the U.S. Starts Real Negotiations with China (There is a likelihood of continued growth in #NDX and Ethereum)

A new wave of euphoria has swept through the markets. Many believe it's not a coincidence: take everything away from a person and then provide them with even the smallest

Pati Gani 09:03 2025-04-23 UTC+2

What to Pay Attention to on April 23? A Breakdown of Fundamental Events for Beginners

A considerable number of macroeconomic events are scheduled for Wednesday. All of them are Purchasing Managers' Index (PMI) reports for April in the services and manufacturing sectors. The indices will

Paolo Greco 07:01 2025-04-23 UTC+2

GBP/USD Overview – April 23: The British Pound Can't Stop Smiling

On Tuesday, the GBP/USD currency pair traded much more calmly, yet again showed signs of a "maxed-out flat" pattern. As previously noted, the US dollar has only had two behaviors

Paolo Greco 04:56 2025-04-23 UTC+2

EUR/USD Overview – April 23: Another Calm Before Another Collapse?

The EUR/USD currency pair traded more calmly on Tuesday than on Monday. The US dollar managed to avoid another fall, but it's too early to celebrate. The greenback can collapse

Paolo Greco 04:56 2025-04-23 UTC+2

USD/JPY. On the Threshold of the 139th Figure

The USD/JPY pair has been in a consistent downtrend for the fourth consecutive week. On Tuesday, sellers pushed the pair to the edge of the 139.00 area, hitting the lowest

Irina Manzenko 00:46 2025-04-23 UTC+2

The Dollar Has Been Replaced. Nature Abhors a Vacuum

Fear paralyzes, but action persists. Investors are slowly overcoming their concerns over Donald Trump's attacks on the independence of the Federal Reserve and are starting to lock in profits

Marek Petkovich 00:08 2025-04-23 UTC+2

Bitcoin Took Its Chance

Slow and steady wins the race! Bitcoin quietly broke through to its highest levels since early March amid Donald Trump's attacks on Jerome Powell. When the independence of the Federal

Marek Petkovich 00:08 2025-04-23 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.