FOREX Fundamental Analysis for November 16, 2023
The UK inflation report came as a surprise to the market, as the figure fell below 5% for the month. The derivatives market immediately moved the start of the potential expansion of the British regulator from July to June, sterling went down and dragged EUR/USD with it. Of course, central banks act in concert, and if the Fed is determined to end the monetary restriction cycle, other regulators will start to signal a dovish reversal.
The fact that inflation is slowing at the same time in most countries suggests that its causes were related to the disruption of supply chains due to the COVID-19 pandemic. As they recover, consumer prices will decline and reach pre-pandemic levels. In such conditions it makes no sense to keep rates at high positions, so the derivatives market expects that their decline in the Eurozone will begin in April, in the U.S. in May, and in the UK in June.
This forecast is clearly not in favor of EUR/USD and EUR/GBP. But, most likely, the dollar will be most in the negative, as the Fed is the unquestionable leader in both monetary restriction and expansion. After the release of the U.S. inflation report, the dollar index showed the worst dynamics of the current year relative to other forex currency indices.
In addition, with the slowdown of the United States economic growth rate, the divergence between the US and Eurozone economies is narrowing, which will be a good support for EUR/USD growth. The first signal of the realization of this scenario was a weak report on US retail sales.
What can the Fed do in today's realities? It is unlikely that the weakening of financial conditions will please the American regulator. It is not for the same reason that the Central Bank has been doing such a colossal amount of work for two years. But the Fed is also afraid of losing credibility. What will the Central Bank look like if it declares victory over inflation and is immediately convinced of its return? Better to leave a loophole for itself and repeat the mantra that the fight is not over.
Investors are unlikely to take Jerome Powell's hawkish speeches seriously, so our forex trading strategy suggests using EUR/USD downside pullbacks to 1.072 and 1.070 to build up longs.