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Despite a decline in expectations for an interest rate hike at the Fed's October meeting, the US dollar is holding on to its previous gains. This is supported by persistent expectations of further interest rate increases amid continued inflation growth.
Today, the US dollar has weakened somewhat in the Forex market. This is due to the release of fresh US consumer inflation data for September next Wednesday. Against this backdrop, uncertainty remains over the figures. Will they show a more pronounced increase in inflation or not? If the report indicates even a slight increase in inflationary pressure, the Federal Reserve may decide not to raise interest rates this month but could consider doing so in December if the data confirm the trend.
The extremely weak September labor market report has significantly reduced the likelihood of an interest rate hike at the October meeting. Federal funds rate futures indicate an 80.6% probability that market participants expect interest rates to remain unchanged. However, the situation could change again if inflationary pressure intensifies significantly. In that case, the probability of a rate hike would rise again, potentially supporting a renewed appreciation of the US dollar in the Forex market.
Given the importance of the inflation report, significant market movements are unlikely before its release. The importance of this report cannot be overstated, as it could revive speculation about a more aggressive pace of Fed rate hikes. For example, the Fed might raise rates by 0.25 percentage points twice in December rather than just once. A rate hike at the October meeting is also possible, despite Kevin Warsh's apparent preference for a different outcome.
As for Monday's potential price action, the consolidation phase may continue before a stronger move on Wednesday, most likely toward increased demand for the US dollar.
The pair has remained virtually unchanged just below the strong resistance level at 1.1235. It could then resume its decline toward 1.1112 following the US inflation report. The 1.1222 level could serve as an entry point for a short position, with a stop-loss at 1.1281.
The pair is trading below the resistance level at 158.50. A break above this level could push the pair higher toward 160.25. The 158.62 level could serve as an entry point for a long position, with a stop-loss at 157.47.
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