05.10.202216:00 Forex Analysis & Reviews: EUR/USD. The dollar fell into disgrace: for how long?

The corrective upward impulse of the EURUSD pair seems to be fading away. Despite the steady rise in price, buyers failed to test the 1.0000 mark, which is currently the key resistance level. Traders will still likely try to overcome this price barrier, but at the same time, it is highly doubtful that the EUR/USD bulls will be able to gain a foothold above the parity level in order to build on their success.

Increasing geopolitical tensions, a deepening energy crisis, growing risks of stagflation in the European region—all these fundamental factors are still playing against the euro. The dollar, in turn, fell "in disgrace" for only one reason: the hawkish expectations on the possible outcome of the November meeting of the Fed unexpectedly decreased on the market. This happened after the publication of the disappointing ISM index in the US manufacturing sector, which turned out to be in the "red zone."

However, in my opinion, the market hastened to "dovish" conclusions. Firstly, the November meeting is still four weeks ahead, during which key macroeconomic indicators in the field of inflation and the labor market will be published. Secondly, inflation indicators already published earlier (among which is the most important PCE index) suggest that the US regulator will not slow down the pace of tightening monetary policy. At least in the context of the November meeting.

It is also impossible to discount the geopolitical factor. Yesterday, in response to the US decision to send additional military aid to Ukraine, a spokesman for the Russian Foreign Ministry said that this fact "accelerates the possibility of a direct military clash between Russia and NATO." In general, the situation here is developing along an escalation rather than a de-escalation spiral, so it is still premature to talk about a decrease in anti-risk sentiment in the markets.

The reasons for the weakening of the dollar this week are situational. After the publication of a weak report on the growth of the ISM manufacturing index, the market has reduced the likelihood of a 75-point increase in interest rates at the November meeting. The FedWatch Tool – monitoring the probability of a change in the Fed rate – reduced this probability to 50%, while before the release it was at a 70% level. Against this backdrop, treasury yields declined, and the stock market "revived": key Wall Street indices showed positive dynamics, while the greenback was under pressure throughout the market.

And here a logical question arises: will EUR/USD buyers be able to further strengthen their positions, relying on such shaky fundamentals? Note that the day after tomorrow (that is, on Friday) Nonfarm Payrolls will be published, and next week—reports on the growth of the consumer price index in the US and the producer price index. And if these releases come out at least at the level of forecasts, the probability of the implementation of the 75-point scenario at the November meeting will increase again, with all the ensuing consequences.

Judging by preliminary forecasts, the labor market will not disappoint: the unemployment rate in the United States should fall to 3.6%, and the number of people employed in the non-farm sector will increase by almost 300,000. The level of average hourly wages should similarly demonstrate positive dynamics, having risen by 5.2% in annual terms. As for inflation, further growth of key indicators is also expected here. For example, the September consumer price index should rise to 8.2% year-on-year.

Recall that at the end of September, the inflation report on the growth of PCE was published. As you know, this is one of the main inflation indicators monitored by the Fed. It reflected the acceleration of inflation. On an annualized basis, the core price index for personal consumption expenditure hit a multi-month high at 4.9%.

Given such "input data," can we now talk about any prerequisites for softening the Fed's position? In my opinion, no. In fact, the representatives of the Fed themselves do not soften the tone of their rhetoric. In particular, Atlanta Fed President Raphael Bostic said last week that the baseline scenario currently calls for a 75 bps hike in November and 50 bps in December. Other of his colleagues (including Philip Jefferson, Thomas Barkin, Loretta Mester, Mary Daly) also stated that they are ready "for further decisive struggle against inflation." None of them said that the Fed needs to slow down the pace of monetary tightening. At least, in the context of the November meeting, there were no such statements.

Thus, in my opinion, the rise in the price of EUR/USD is of a corrective nature. For further development of the correction, buyers need not only to overcome the parity level, but also to gain a foothold above 1.0050. In this case, the 1.0000 mark will act as a support, a price barrier. But the de facto EUR/USD bulls have not even come close to bottom-up parity. All this suggests that the upward momentum will gradually fade away, and eventually the sellers will seize the initiative again. Therefore, the tactic of opening short positions on upward pullbacks is still the most appropriate. The nearest downward targets are 0.9870 (the middle line of the Bollinger Bands, coinciding with the Kijun-sen line on D1) and 0.9750 (the Tenkan-sen line on the same timeframe).