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08.02.2023 05:25 PM
EURUSD and U.S. inflation to face a bumpy path

Markets hear what they want to hear. They found no direct link in Jerome Powell's speech between the strong January U.S. jobs report and the additional hike in the federal funds rate. They drew attention to the familiar word pause as the Fed chairman spoke of his own preferences for yet another increase in borrowing costs, followed by an assessment of the consequences of the steps already taken for the U.S. economy. All this led to a rally in stock indices and an upward rebound in EURUSD. How long will it last?

In fact, the key point in Powell's speech at the Economic Club of Washington is the long and, most importantly, bumpy path that disinflation has to take. The Federal Reserve seems to not expect consumer prices to slow down the same way as in 2022. A strong labor market hints unequivocally about new peaks and troughs. That's what the word "bumpy" means. And if the growth rate of the U.S. CPI in January turns out to be higher than in December, we should expect an increase in the proposed ceiling for the federal funds rate. It currently stands at 5.1%, in line with FOMC forecasts.

Federal Funds Rate Forecasts

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5.25% or even 5.5% would not be something shocking to the markets. The 6% that Citigroup is talking about is another matter. According to the company, U.S. stock indices are severely overvalued and will collapse by 15% before the end of the year amid a depletion of excessive optimism about the Fed's dovish reversal. For the S&P 500 to rise from current levels requires a 10% slump in the U.S. dollar. And if the Fed raises the cost of borrowing higher than investors currently expect, can it be counted on?

If the U.S. stock market goes down, EURUSD will not do well. Credit Agricole expects to see the major currency pair at 1.05 over the next few weeks. It is unlikely to drop below, as this requires alarming signals from the eurozone economy, the return of the forgotten topic of expanding spreads in its bond market, and the appearance of "doves" in the ranks of the Governing Council. All this in aggregate is unlikely, but the figure of 1.05 looks frightening for the bulls, who only yesterday dreamed of fixing the pair above 1.1.

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In my opinion, the market is again looking into the mouth of the Fed. And if the policy of the central bank depends on the data, then the dynamics of EURUSD will be determined by macroeconomic statistics. First of all, inflation in the U.S. On the eve of an important release, the major currency pair may opt for short-term consolidation.

Technically, a pin bar with a long lower shadow was formed on the EURUSD daily chart. In theory, a break of its high at 1.0775 is a reason to go long towards 1.082 and 1.085. A necessary condition for the implementation of this strategy is the pair's consolidation above the lower boundary of the fair value range 1.073–1.092 and the pivot point at 1.076.

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