US core inflation has risen to the highest level since 1982, causing the EURUSD to jump up and down. What’s next? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Monthly euro fundamental forecast
For the first time in history, the Dow dropped at least 500 points in a single trading session and soared at least 800 basis points. The so-called roller coaster resulted from the increased sensitivity of financial markets to US domestic data. The release of inflation data for September was a real shock for investors. There are a few times when EURUSD sellers have changed their minds, such as was on October 13th.
When the euro falls against the US dollar on the eve of a major release in four of the last seven trading sessions and closes the day at the same level in the remaining three, there must work out the principle of buying the news, selling the facts, concerning the greenback.
The acceleration of core inflation in the United States to 6.6%, the fastest growth in 40 years, caused EURUSD quotes to sink by more than 100 pips within a few minutes. And next, the buyers went ahead.
Dynamics of US inflation
Source: Wall Street Journal.
A short move up was enough for the bears to exit shorts, being worried about losing the profit. And the upward movement happened thanks to the US stock market.
Such strong movements in dollar pairs became possible due to the high bets of hedge funds to buy greenbacks against six major world currencies. Even though its corresponding ICE index has risen by a record 18% since the beginning of the year, speculators continue to buy US currency. According to Citi, they are doing the right thing.
The dollar is the safest haven and will only fall in demand when the global economy bottoms out. Even slowing down the pace of the Fed’s monetary tightening will not be enough to stop the rally in the USD index. Based on the previous history, it is only the improving outlook for the global economy outside of the USA that breaks the greenback uptrends.
Dynamics of USD
Source: Bloomberg.
In my opinion, Citi is right. On the sidelines of the meeting of the heads of central banks and G20 finance ministers, the main topic was the strengthening of the US dollar. Many would not mind using a coordinated foreign exchange intervention similar to the Plaza Accord in 1985. However, firstly, this requires the participation of the Fed, which is unlikely now. Secondly, in 1985, the Fed ended the cycle of tightening monetary policy and began to cut rates, looking at a slowdown in inflation from 15% to 4%.
What does it say? Even after the end of the cycle of aggressive monetary restrictions and a significant decrease in the price growth rate, the US dollar still strengthened. I believe the US dollar will continue rising in the next 6-9 months, especially amid an increased chance of 60%-70% of the federal funds rate hike by 75 basis points in December and a rise of the expected peak rate to 5% by March.
Monthly EURUSD trading plan
Don’t be fooled. Fed has not reached its target, and the market is currently going against the Fed. It has always failed in the past. So, it is still relevant to sell the EURUSD with an initial target at 0.95.
Price chart of EURUSD in real time mode
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