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Data on the growth of US inflation were frankly weak. All components of today's release were in the red zone, showing a systemic decline. CPI is slowly sliding down after reaching its peak in July (2.9% yoy), reaching 2.3% in September. On the eve of the release, experts predicted a slowdown in inflation indicators, but the real figures were even worse than pessimistic forecasts. The core inflation index (Core CPI) also fell short of expectations and in annual terms came out at 2.2% – the second month in a row.

Published figures cause dollar bulls to ponder. It is one thing when it comes to a one-time reduction of a key indicator, and another thing when there are signs of a certain trend. Inflation in the United States shows a slowdown for the second month in a row, so the regulator will not be able to simply ignore this fact, as the Federal Reserve did at its last meeting. Moreover, the events of recent days may have broader implications that will affect the pace of monetary tightening. The fact is that the market is increasingly reminded that the growth of the interest rate has a reverse direction – firstly, the yield of treasuries is increasing, putting pressure on the stock market, and secondly-slows down inflation.

Exchange Rates 12.10.2018 analysis

By a surprising coincidence, traders within one day were able to feel the manifestation of these "side effects" in just a day: stock markets yesterday fell to multi-month lows (trying to regain positions today), and inflation slowed down more than expected. Donald Trump is an illustrative background to this picture, who criticized the Fed, accusing members of the central bank of rash actions.

Lower-ranking US officials (in particular, the US Treasury Secretary and the White House economic adviser) with their inherent diplomacy are trying to "clarify" the position of their boss, explaining that Trump does not put pressure on the Fed and respects its independence. But these attempts look plainly absurd, because Trump's accusations are quite straightforward and it is impossible to understand them ambiguously. That is why if the Fed accelerates the pace of the rate hike, all further economic problems (which at least indirectly can be linked to the actions of the regulator) will be "hung" on Jerome Powell and the other members of the Federal Reserve.

However, the main problem of the dollar (so far hypothetical) is the position of the Fed. The next meeting of the US central bank, the last but one for this year, will be held on November 8-that is, almost a month before it. Most likely, the data on the growth of US inflation for October will be released after the November meeting, so the members of the Fed will have to estimate the figures that will be at their disposal at the time of the meeting. It is doubtful that the dynamics of PPI and CPI will reduce the determination of Fed members so that they change their plans for December. In my opinion, dollar bulls should be afraid of another factor - namely, the collapse of quotations in the stock markets.

Exchange Rates 12.10.2018 analysis

If such a situation persists before November, then regulators will not be able to show carefree determination about the December actions, and at least will take a more cautious position. Let me remind you that at the end of the November meeting there is no press conference of Jerome Powell, so traders will have to be satisfied with only the accompanying statement. This means that any change in wording, any word that will cast a shadow of doubt on the determination of the Fed, will cause strong volatility in the foreign exchange market.

Given the pessimistic fundamental background, the resistance of the EUR/USD "bears" is somewhat surprising. But only at first glance: after all, the problems of the dollar are hypothetical, while the problems of the euro are tangible in "real time". Rome continues to insist on the declared size of the budget deficit, the European Commission threatens the Italians with sanctions, and Moody's and S&P are preparing to reduce the rating of Italy at the end of October. In addition, a rather vague minutes of the last meeting of the ECB was published today, which left more questions than answers.

Thus, according to some members of the European regulator, a number of factors that have slowed the economic growth of the eurozone are not temporary, so they can continue to serve as a particular "anchor". Unfortunately, the regulator has not voiced exactly what the factors meant and how widespread their influence is. A general conclusion can be made from the document published today: the ECB will not consider raising the rate before mid-autumn 2019. This position did not come as a surprise to EUR/USD traders, but naturally, it didn't evoke delight either.

Exchange Rates 12.10.2018 analysis

Thus, despite the weakening of the dollar, the euro does not have enough strength to seize the initiative and reverse the trend at the moment. So far, we are dealing with a corrective growth, where the key marks are 1.1580 (the upper limit of the Kumo cloud on the daily chart) and 1.1620 (the average line of the Bollinger Bands indicator coinciding with the Kijun-sen line on D1). We can only talk about the prospect of large-scale growth when these resistance levels are fixed above. And at the moment, the growth of the pair is uncertain, where the risk of falling to the bottom of the 15th figure is quite large.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Performed by Irina Manzenko,
Analytical expert
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