The market is testing the Federal Reserve’s resilience for the fifth time in the current cycle of monetary policy tightening. The four previous attempts, when the decline in Treasury yields indicated a dovish pivot, turned out to be failures. However, if the Fed does make a mistake regarding the unfinished fight against inflation, there’s an opportunity to make decent money on the EUR/USD reversal.
Market’s Challenges to the Fed
Don’t go against the Fed. This rule is as old as time, but investors never tire of breaking it. After the November FOMC meeting and the U.S. labor market report for October, the perception has emerged that the U.S. economy is cooling, and the central bank has done its job and concluded the cycle of monetary restriction. If this is the case, it’s time to factor in expectations of a reduction in the federal funds rate. Derivatives suggest it could fall to 4.5% by the end of 2024, which puts pressure on Treasury bond yields and the U.S. dollar.
But what if things don’t go according to plan? The market often draws parallels with the 1970s when, due to the crisis in the Middle East and OPEC’s embargo against Israel, oil prices soared. This triggered a new inflation peak, forced the Fed to restart the cycle of monetary tightening, and resulted in a double recession for the U.S. economy. Is history repeating itself?
Let’s not forget about the Taylor Rule, according to which monetary policy is still not tight enough. The federal funds rate has room to rise, as does the U.S. dollar. With the current unemployment rate and still high inflation, this seems logical.
The Taylor Rule in Action
Finally, Federal Reserve Chairman Jerome Powell might surprise with a hawkish rhetoric in his upcoming speeches. Powell is unlikely to have been pleased by the substantial easing of financial conditions after the release of U.S. employment data for October. The drop in Treasury yields, the U.S. dollar, and the rapid rally of stock indices created a favorable environment for a new inflation acceleration. The Fed’s mission, however, is the opposite—to bring the personal consumption expenditure index to the 2% target.
In such a scenario, supporters of the U.S. dollar have plenty of arguments for the bullish case, and the premature exit of the EUR/USD quotes from the 1.05–1.07 consolidation range seems justified. However, the U.S. economy may likely slow down under the influence of the Fed’s aggressive monetary tightening. This will increase the risks of a recession and the likelihood of a dovish pivot. In such conditions, the rally of the major currency pair looks reasonable, and the current short-term decline in quotes is the result of investor concerns about Powell’s hawkish rhetoric.
Technically, if a bar with a wide range like the one on November 3 doesn’t close within the next two days, there’s a high probability that the upward movement will continue. Therefore, the return of EUR/USD above the 1.0695 pivot level should be used for purchases.
The material has been provided by InstaForex Company – www.instaforex.com
The market is testing the Federal Reserve’s resilience for the fifth time in the current cycle of monetary policy tightening. The four previous attempts, when the decline in Treasury yields indicated a dovish pivot, turned out to be failures. However, if the Fed does make a mistake regarding the unfinished fight against inflation, there’s an opportunity to make decent money on the EUR/USD reversal.
Market’s Challenges to the Fed
Don’t go against the Fed. This rule is as old as time, but investors never tire of breaking it. After the November FOMC meeting and the U.S. labor market report for October, the perception has emerged that the U.S. economy is cooling, and the central bank has done its job and concluded the cycle of monetary restriction. If this is the case, it’s time to factor in expectations of a reduction in the federal funds rate. Derivatives suggest it could fall to 4.5% by the end of 2024, which puts pressure on Treasury bond yields and the U.S. dollar.
But what if things don’t go according to plan? The market often draws parallels with the 1970s when, due to the crisis in the Middle East and OPEC’s embargo against Israel, oil prices soared. This triggered a new inflation peak, forced the Fed to restart the cycle of monetary tightening, and resulted in a double recession for the U.S. economy. Is history repeating itself?
Let’s not forget about the Taylor Rule, according to which monetary policy is still not tight enough. The federal funds rate has room to rise, as does the U.S. dollar. With the current unemployment rate and still high inflation, this seems logical.
The Taylor Rule in Action
Finally, Federal Reserve Chairman Jerome Powell might surprise with a hawkish rhetoric in his upcoming speeches. Powell is unlikely to have been pleased by the substantial easing of financial conditions after the release of U.S. employment data for October. The drop in Treasury yields, the U.S. dollar, and the rapid rally of stock indices created a favorable environment for a new inflation acceleration. The Fed’s mission, however, is the opposite—to bring the personal consumption expenditure index to the 2% target.
In such a scenario, supporters of the U.S. dollar have plenty of arguments for the bullish case, and the premature exit of the EUR/USD quotes from the 1.05–1.07 consolidation range seems justified. However, the U.S. economy may likely slow down under the influence of the Fed’s aggressive monetary tightening. This will increase the risks of a recession and the likelihood of a dovish pivot. In such conditions, the rally of the major currency pair looks reasonable, and the current short-term decline in quotes is the result of investor concerns about Powell’s hawkish rhetoric.
Technically, if a bar with a wide range like the one on November 3 doesn’t close within the next two days, there’s a high probability that the upward movement will continue. Therefore, the return of EUR/USD above the 1.0695 pivot level should be used for purchases.
The material has been provided by InstaForex Company – www.instaforex.com
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