FOREX Fundamental Analysis for November 8
The Fed is hard to please. If before last week Jerome Powell's team expressed concern about high yields of debt bonds, now the regulator fears the reverse process, as the growth of stock indices hinders the Central Bank's fight against high inflation.
FOMC members are returning to hawkish comments. In particular, Michelle Bowman believes that the growth of third quarter GDP by 4.9% indicates a stable recovery of the United States economy, so the regulator can continue the cycle of tightening financial conditions. The head of the FRB Dallas Lori Lagan believes that inflation has a better chance to return to 3% than to fall to 2%, if the Central Bank does not continue the cycle of raising rates.
Nevertheless, investors do not want to listen to the statements of the Fed representatives and make their own plans. In particular, Deutsche Bank calculated that during the current monetary tightening cycle, investors have predicted a dovish reversal seven times. Naturally, this led to traders' losses and did not influence the regulator's position in any way.
Now derivatives are already predicting the rate decrease by 92 basis points in 2024. But, for such a serious reduction, you need no less serious reason, for example, a recession. And there isn't one. Yes, the labor market report was not as optimistic as many wanted it to be. But it can't be called weak either, especially when looking at similar indicators of other developed countries. Actually, before the pandemic, employment was growing at the same rate, and it was considered good.
Maybe such reaction of traders was caused by the announcement of the Treasury about the reduction of debt bonds emission and some hints of the monetary authorities about the soon end of the "hawkish" course. In any case, the revaluation of values started this week, which immediately led to a downward pullback of EUR/USD. It is unlikely that the weakening of the dollar will please Jerome Powell. After all, it will negate the enormous efforts of the Fed, aimed at fighting inflation. This is where the return to the mistakes of the 1970s looms in the distance.
Of course, the dollar is losing the drivers of strengthening, but the European currency does not have a lot of them. Probably, the U.S. inflation report will help to determine the positioning. If prices show a real decline, the Fed will keep a neutral position, and EUR/USD will head towards 1.09.
Jerome Powell speaks today, and the speech of the head of the regulator can shake up the volatility of currency pairs. From a technical point of view, we will cautiously increase purchases on the breakout of 1.0705 and 1.0725 resistances.