16.11.202123:12 Forex Analysis & Reviews: EUR/USD. Former Fed officials supported greenback: Lacker and Dudley increased hawkish expectations

The euro-dollar pair continues to plunge down, reflecting the strength of the downward trend. In just a week, the price collapsed by almost 300 points: if last Monday traders tested the boundaries of the 16th figure, today another price low of 1.1330 was updated. At the same time, the downward momentum is not fading: the EUR/USD bears clearly intend to enter the area of the 12th figure, in the wake of the general strengthening of the US currency.

Today, the dollar received support from macroeconomic statistics. Key data on the volume of retail sales in the United States came out in the green zone, offsetting the concerns of some experts about the pace of consumer activity of Americans. So, excluding car sales, this indicator jumped to 1.7% in October, with a forecast of growth to 0.9% and the previous value of 0.7%. Taking into account auto sales, the indicator also surprised with strong figures, rising to 1.7%, while experts expected it to be around 1.3%. The retail control group indicator (it correlates with the consumer spending component of US GDP) jumped by 1.6% with growth forecast to 0.9%. This is a fairly strong result compared to the previous months. On the one hand, analysts expected to see an increase in the main components, taking into account indirect macroeconomic signs (for example, for the first time since April of this year, sales of new vehicles in the States were recorded – by 6% on a monthly basis at once). On the other hand, the result exceeded all expectations.

I was also pleased with another macroeconomic report today. Thus, the volume of industrial production in the United States increased significantly in October, reaching 1.6% (with growth forecast to 0.9%). This indicator has been in the negative area for two months. The October result is the best since March of this year.

Additional support for the greenback was provided by the comments of some representatives of the Federal Reserve. The consistent hawk James Bullard, who will have the right to vote in the Committee next year, said today that the Fed is "obliged to accelerate the curtailment of incentives." Also, the head of the St. Louis Fed insists that the Fed's policy in the coming months will become "more hawkish." In particular, he proposed to accelerate the curtailment of QE to 30 billion per month. This step, according to him, will increase the interest rate at the end of the first quarter of next year. At the same time, he admitted the possibility that the central bank would start tightening the parameters of monetary policy even before the completion of the curtailment of the stimulus program. According to Bullard, the base RFE is "too high", so the central bank needs to take retaliatory measures.

In this case, the concern of the head of the St. Louis Federal Reserve is fully justified. The most preferred inflation indicator by the Fed - the index of personal consumption expenditures (PCE) – significantly exceeds the target level of the central bank. The core PCE index, which does not take into account volatile food and energy prices, rose by 3.7% in September (in annual terms). At the same time, it was released at the same high level in August, July, and June.

In general, the opinion is strengthening in the market that the head of the Fed is unreasonably delaying a theatrical pause in the issue of raising the rate. Fed Chairman Jerome Powell continues to insist that the increase in inflation is temporary, so there is no hurry for the US central bank. Not only representatives of the hawk wing of the Fed and many experts disagree with him, but also former representatives of the Fed. In particular, the former head of the Federal Reserve Bank of Richmond Jeffrey Lacker and the head of the Federal Reserve Bank of New York William Dudley made quite "hawkish statements" yesterday. Their comments were of a similar nature, so a common position can be indicated here.

So, according to former FOMC members, the US central bank needs to significantly accelerate the pace of curtailing the asset purchase program. In addition, according to ex-officials, the Fed "will be forced" to increase the federal funds rate to at least three percent. They say that this is the only way the central bank will be able to curb inflationary growth. Arguing their position, they noted that even if the temporary factors that push inflation up weaken, the rise in consumer prices will be largely due to the growth of wages. According to the latest Nonfarm reports, the average hourly wage rose to 0.6% on a monthly basis (the best result since April this year). In annual terms, the index also accelerated its growth, reaching 4.6% (the best result since February of this year). Commenting on the current situation, former head of the Federal Reserve Bank of New York William Dudley expressed confidence that the Fed will start raising the rate "in June or a little later." Moreover, the subsequent pace of monetary policy tightening "will be higher than the markets expect."

This "hawk pumping" inspired dollar bulls to new achievements. The US dollar index renewed its multi-month high (95.74), and the EUR/USD pair, respectively, renewed its multi-month low (1.1330). The European Central Bank maintains a dovish position, excluding the option of early decisions - both regarding QE, and (even more so) regarding the rate. Therefore, the euro has no counter-arguments to develop a large-scale correction.

All this suggests that the downward trend has not yet exhausted itself. Traders "spur" themselves on, fueled by strong macroeconomic releases and comments from Fed officials, both current and former. At the moment, the main support (with the downward movement as the target) is located at 1.1300.