The beginning of today's European trading session was marked by a new offensive of the dollar. As of this writing, dollar index (DXY) futures are near 109.78, 128 points above this week's opening price and 233 points above this week's low hit on Tuesday ahead of US inflation data.
According to the US Bureau of Labor Statistics, inflation rose above expectations in August. The consumer price index (CPI) came out with a value of +8.3% on an annualized basis against the forecast of +8.1% and +8.5% in the previous month. On a monthly basis, inflation rose by +0.1% from 0% in July, which was above expectations for a decline of -0.1%. It follows from the report that inflation has begun to gain momentum again. That, in turn, makes a 75 basis point rate hike at next week's FOMC meeting now "virtually guaranteed," economists say.
Even though other major global central banks are also tightening their monetary policies, the Fed's interest rate decisions have the biggest impact on the market. One way or another, the share of the US dollar in international settlements at the beginning of this year was almost 39%, as follows from the materials of the SWIFT interbank transfer system (the share of the euro increased to 38%, the pound sterling – 6.76%, Chinese yuan – 2.23 %, and yen – 2.71%). As a matter of fact, we see what happens in the financial market when the decisions of the Fed and the ECB on interest rates are published.
Based on our assumption and these data, the next week will be especially distinguished by its volatility.
On Tuesday, the Fed meeting will begin, which will end on Wednesday with the publication of the decision on the interest rate. Looking ahead, another 0.75% Fed rate hike is widely expected. On Thursday, immediately 3 of the world's largest central banks (Japan, Switzerland, and Great Britain) will also hold their meetings on monetary policy issues. On Friday, the most important European and American business activity indices will be published, which may sharply increase volatility again at the end of next week. Thus, high volatility will accompany most of the next trading week, providing investors with a lot of additional trading opportunities.
The dollar ends this week in positive territory. Its DXY index remains positive and has upside potential to more than 20-year-old levels above 120.00. The breakout of the recent local high at 110.78 will be a confirming signal of our assumption.
The EUR/USD pair, having received support from the results of the ECB meeting last week, came close to the local resistance level and the 1.0200 mark.
European Central Bank President Christine Lagarde said today, "a rate hike should be a signal that we (at the ECB) will reach our price target." Earlier, Central Bank Governor Olli Rehn said, "there is reason to advance the tightening cycle," suggesting "further rate hikes."
Thus, the euro also had grounds for strengthening, despite the growing "risk of a recession in the Eurozone," as Rehn said.
Will there be another return to the zone above parity at 1.0000? Perhaps there will. But whether there will be further growth, only time will tell. This will largely depend on both the position of the ECB and the Fed regarding the prospects for monetary policy. In general, the downward dynamics of EUR/USD remains.
And from the news for today, it is worth paying attention to the publication at the beginning of the American trading session of the preliminary consumer confidence index of the University of Michigan. This index is a leading indicator of consumer spending, which accounts for the majority of overall economic activity. It also reflects the confidence of American consumers in the economic development of the country. The growth of the indicator (as expected to the value of 60.0 against the previous 58.2) will strengthen the USD.
