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EUR/USD upward trend recovery still slim amid U.S. inflation slowdown
May 10, 2023 5:22 pmVideo
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On Forex, there are always two sides. “Bulls” and “bears.” Winners and losers. Fear and greed. And now, the market is divided into two camps. Some argue that the U.S. economy will slide into a recession, and the Fed will make a “dovish” pivot. This gives reason to sell the U.S. dollar. Others, on the contrary, are confident in a prolonged holding of the federal funds rate at 5.25% and hope for a soft landing. They are counting on a correction of EUR/USD.
Supporters of the transition to monetary expansion are easy to understand. History is on their side. Since the 1970s, the Fed has reduced borrowing costs an average of 5 months after it peaked. In the last 40 years, the yield curve has not returned to positive territory until the Central Bank made the first rate cut to the federal funds.
Dynamics of the Fed rate and the U.S. yield curve
At the same time, Goldman Sachs noticed another pattern: the Fed rarely eased monetary policy when labor markets were strong. This argument was even more important for the central bank than inflation. It is not surprising that after the report on U.S. employment for April, EUR/USD started to confidently move downward. At the same time, derivatives dropped the chances of September monetary expansion from 90% to 51%, and July’s from 50% to 26%.
The U.S. dollar has a strong “bullish” argument in the form of the withdrawal from the market of the idea of a “dovish” pivot of the Fed. The euro, on the other hand, operates with old aces. In particular, the theme of continuing to raise the deposit rate. It is already accounted for in the main currency pair’s quotes. In this regard, there are no chances for a rematch for EUR/USD buyers for now.
Indeed, investors calmly accepted the statement of Executive Board member Isabel Schnabel that the ECB should do more to bring excessively high inflation back to the 2% target. However, the words of the heads of the Bundesbank and the Bank of Greece that the European regulator is approaching the finish line on the path to tightening monetary policy accelerated the fall of EUR/USD. Moreover, Joachim Nagel is satisfied with the current monetary restriction cycle, and Yannis Stournaras believes that it will end this year.
The slowdown in U.S. consumer prices from 5% to 4.9% and core inflation from 5.6% to 5.5% YoY in April is unlikely to change the balance of power in the main currency pair. In monthly terms, the indicators continued to grow by 0.4%, remaining at elevated levels. Due to insignificant changes, the Fed will not change its opinion on the prolonged holding of the federal funds rate at 5.25%. The idea of a “dovish” pivot becomes unpopular, and the U.S. dollar is rising.
Technically, on the daily chart, EUR/USD has room for a correction to the upward trend due to the implementation of the Double Top reversal pattern. If the “bulls” fail to return the pair above 1.1015 and 1.1035, there will be an opportunity to increase the shorts formed from the level of 1.101.
The material has been provided by InstaForex Company – www.instaforex.com
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