The six-day EURUSD rally gave way to the best daily dynamics of the USD index in the last five years after the release of US inflation data. Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
Thanks to US inflation in September, the greenback showed who is boss in Forex. As soon as consumer prices rose by 3.7% YoY and 0.4% MoM, exceeding the forecasts of Bloomberg experts, the chances of a reduction in the federal funds rate in June 2024 fell from 65% to 57%. As a result, the USD index recorded its best daily dynamics in five years, while EURUSD fell despite its weekly growth.
US inflation dynamics
Source: Wall Street Journal.
At first glance, the market reaction seems excessive. Actual inflation data deviated slightly from forecasts. However, one must consider the environment in which investors now have to work. Boston Fed President Susan Collins is yet another FOMC official who believes financial markets do part of the Fed’s job. Further growth in Treasury yields reduces the need to raise the federal funds rate.
Most Fed officials point to tightening financial conditions and are ready to make decisions depending on debt market conditions. Usually, the opposite happens, and investors react to monetary policy. In addition, financial conditions are approximately as tight as they were a year ago. Why did Fed officials take such a stance right now?
Dynamics of US financial conditions
Source: Wall Street Journal.
Neither the central bank nor the Treasury likes the rapid rally in Treasury yields. It reduces the possibility of a soft landing and increases debt servicing costs. Fed officials use their statements to influence markets. Markets perceive the speeches of FOMC officials as a signal of the monetary restriction cycle’s end. Moreover, they are starting to talk about a dovish reversal.
The inflation report brought buyers of Treasuries and EURUSD back to earth. In fact, the Fed will make decisions based on economic data and not on debt market conditions. If so, the Fed funds rate could still rise. Indeed, many believed that consumer prices would only decline. However, this road risks being bumpy. The CPI will speed up and slow down over and over again. Therefore, the central bank intends to keep borrowing costs at a plateau for a very long time. This is great news for the US dollar.
The September inflation report, the latest data on employment, GDP, and consumer prices, indicate the economy is not cooling at all. A strong economy is unlikely to have weak inflation and currency. Moreover, in conditions where the eurozone is weakening, and the ECB believes that the risks of continuing the cycle of monetary restriction are higher than the danger of a pause.
Weekly EURUSD trading plan
Thus, thanks to macro statistics, the US dollar showed who is boss. It’s too early to write it off. Focus on sales while EURUSD remains below 1.059.
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