The EURUSD surge amid a weak report on the US inflation was a Pyrrhic victory for the bulls. The price quickly returned to the bottom of figure 18, which looks logical ahead of the FOMC meeting. Let us discuss the forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
One should be a daredevil to sell the US dollar just because of the slowdown in inflation a week before the FOMC meeting, at which the central bank may present a hawkish surprise. In August, the US consumer-price index rose 0.3% M-o-M, slower than the 0.5% one-month increase in July, falling short of Bloomberg experts’ forecasts. The CPI performance has turned out to be the worst over the past seven months, which should theoretically reduce the likelihood of the Fed deciding to scale back QE in September. Fortunately, historical verdicts are not made based on a single report.
Dynamics of US consumer prices
At first glance, the slowdown in CPI from 5.4% to 5.3% and core inflation from 4.3% to 4% Y-o-Y proves that the high inflation pressure in the US is temporary. Furthermore, the drivers of the inflation growth associated with the pandemic, like the prices for used cars and air tickets, are fading away. Nonetheless, the greenback could lose the battle but win the war. The former drivers of consumer price growth are replaced by the new ones, like rent, furniture, and new cars. The debate about the temporary nature of excessively high inflation has not subsided, but in fact, the Fed does not care much about what is happening to the CPI and PCE now. It is much more important for the central bank what will happen to the indicators in the spring.
In this regard, the moderately disappointing August consumer price report is unlikely to force the central bank to reverse its chosen path of normalizing monetary policy. To postpone the decision to start it, at least one more weak release of employment data is needed. Already in September, despite the slowdown in GDP, the labour market, and inflation, the Fed may decide to taper the QE. The Fed argues that high inflation is temporary, and purchases of assets accelerate it.
The mismatch between what the market sees (deterioration in US macro statistics) and what the central bank can do causes uncertainty and encourages investors to buy the greenback on the corrections. A typical example was the reaction of EURUSD to the inflation report. The bulls lacked some 5 pips to reach the level of 1.185 indicated in the previous material, after which the price quickly fell, proving the euro buyers’ weakness.
The main euro benefits are still a better epidemiological situation in Europe than in the USA and the associated expectations of faster GDP growth in the euro area compared to the United States in the third quarter.
Dynamics and forecasts for GDP
Global economic growth will not accelerate without support from China and the USA. In addition, when only a week is left before the FOMC meeting, the market is focused on monetary policy, forgetting about GDP.
Weekly EURUSD trading plan
I believe that the EURUSD will be more likely to go down to 1.17 amid the approaching Fed’s meeting. In this situation, selling the pair on the price growth will be relevant if it doesn’t go back above 1.1845 or on the breakout of the support at 1.18.
Price chart of EURUSD in real time mode
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