FOREX Fundamental Analysis for November 9
The markets have come to believe that the decline in inflation is happening on its own, with minimal intervention from Central Banks. CPI growth is slowing due to a recovery in logistical linkages, not a decline in demand. However, it is hard to say what would have happened if the Fed had not conducted a rate hike cycle.
Certainly monetary restraint is having an impact on consumer demand. Lending rates are rising, businesses are borrowing less. Corporate and household costs go up. Companies downsize, unemployment goes up, GDP shrinks. But in the United States, the picture is different. Consumer spending in the third quarter rose by 4%, GDP by 4.9%, unemployment remains at half-century lows, and yet inflation is falling.
With supply chains recovering and fiscal stimulus exhausted, inflation could move below the 2% target. The rate is now 375 basis points higher than it was before the COVID-19 pandemic. To raise it any further is to increase the risks of recession in the economy. It is easier and more efficient for the Fed to keep rates high for a longer period of time and adjust them depending on inputs. The main criterion will be the inflation rate. If inflation continues to decline, then it will be possible to gradually move to easing financial conditions. But this process is unlikely to go as fast as the derivatives market predicts.
Nordea assumes that the Fed will leave the current rate values for 2024, but the ECB will start to reduce them in June. Nevertheless, the euro will not go into a peak, as it will be supported by the slowdown in the US economy and growing demand for risky assets.
Indeed, the greenback has won back almost all of its trump cards while the Eurozone had none at all. The DXY index no longer looks like the undisputed leader among other forex currency indices. Someday the Chinese economy will start to recover at a rapid pace, and EUR/USD will be able to work out the targets at 1.07; 1.08 and 1.11. Now, fixing the quote above 1.0725 will be a signal for increasing purchases.