The dollar remains strong before the weekend, trading between a local multi-month high of 96.94 and a recent local low of 95.54 on the index. Another attempt to rise to a new maximum at 97.00 remains in force. Market players overestimate Jerome Powell's hawkish statements made earlier while taking into account Omicron's risks.
Next week, the focus of the market will gradually enter the last meeting of the Fed this year (December 14-15), at which management should announce an acceleration in the pace of reduction of asset purchases. If they are reduced, for example, to $ 30 billion per month, then QE will be completed by March, which means that the first-rate hike will take place closer to the middle of 2022. This scenario is already being laid by the markets, but after they hear confirmation from Powell, expectations of a rate hike will increase. Investors are counting on three tightening of the PEPP in the new year and are buying the dollar-based on these expectations. This prospect creates prerequisites for further strengthening of the US currency.
Next Friday, the US will publish an inflation indicator, which may affect the rigidity of the rhetoric of the Fed leadership at the December meeting. There is reason to believe that the growth rate of consumer inflation decreased slightly in November, and yet they remain high.
Recall that by the end of October, the consumer price index (CPI) added 0.9% monthly, and for the year it rose by 6.2%. The core index (Core CPI) showed an increase of 4.6% in 12 months. Both indicators are at their maximum in more than 30 years, so a slight decrease in pressure on prices will not play a special role, the situation requires intervention, and the Fed now recognizes this fact.
The state of the economy is close to when we can talk about raising rates. This week's indicators confirmed a good trend. The purchasing managers' index for the manufacturing sector rose in November stronger than forecast to 61.1 against 60.8 in October. The ISM index of new orders in manufacturing rose to 61.5 from 59.8 in October, and the ISM employment index for the same reporting period increased to 53.3 from 52.0.
Employment also continues to recover, despite the existing difficulties in this direction. Signs of an improvement in the state of the economy and the labor market, as well as continuing high inflation, may be another reason for the Fed to start tightening policy earlier than previously planned.
In this regard, today's nonfarm are of interest. Meanwhile, the picture of the labor market is ambiguous. Unemployment in November fell to 4.2% from 4.6% in October, but the growth in the number of people employed in non-agricultural sectors of the economy did not meet expectations. The indicator increased by 210 thousand with a forecast of 550 thousand.
If investors are disappointed in the end, then we should expect a rally of EUR/USD to 1.1400. Otherwise, a drop to 1.1235 is possible.
Of course, this report is important for the market, as it comes out on the eve of the Fed meeting. However, it may not be given much importance, because the American Central Bank, judging by the rhetoric, intends to raise rates "no matter what." Here a counter-question arises: will the market decide that the Fed is making a political mistake by tightening policy ahead of time?
Meanwhile, isolated comments began to appear on the network about the fact that the Fed will show firmness of character at the December meeting, and the acceleration of the stimulus reduction will be postponed.
Can such remarks affect the positioning of the "American"? Rather no than yes. The dollar will get out. It is known for its ability to benefit. Goldman Sachs believes that the dollar will retain its growth potential in the coming weeks for two reasons and they do not plan to change its forecast yet.
The growth factor will be the harsh rhetoric of the Fed and Omicron, which will play into the hands of the dollar as a protective asset.
Anyway, the euro looks extremely depressing against the dollar. Of course, it has an internal macroeconomic positive. Thus, the pace of business activity is accelerating in the Old World, despite rising inflation and problems in the supply chains of raw materials and components. The demand for European industrial products remains quite high.
Since inflation in the eurozone has not reached the same magnitude as in the US or the UK, the ECB is unlikely to change its goal of maintaining a super-soft policy. Today, Christine Lagarde, during the Reuters next online conference, once again made it clear to the markets that a rate hike in 2022 is "very unlikely." Economists do not expect a change in the course of monetary policy in 2023. The only thing they hope for is the announcement of the end of the Emergency Asset Purchase Program (PEPP) in March 2022. However, these expectations may not come true.
The EUR/USD pair has no other way but down. The growth of the euro should be considered solely as a temporary corrective movement. At the end of November, for example, it was triggered by a sharp drop in European stock indices.