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10.04.2024 11:58 PM
Dollar spreads its wings

The EUR/USD fell after the U.S. inflation report showed that consumer prices picked up for the third consecutive month. The Consumer Price Index rose 0.4% from the previous month and the all-items index was up 3.5% over the last 12 months, both exceeding Bloomberg forecasts. The same applies to core inflation data. As a result, the U.S. dollar strengthened across the market, and what was actively rising on Tuesday had now fallen in unison. We're talking about oil, gold, and bitcoin. Shortly thereafter, the same fate will befall the S&P 500.

Dynamics of U.S. Inflation

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Just as the Bloomberg experts were wrong about the U.S. GDP, the Federal Reserve stumbled due to inflation. At the end of 2023, analysts forecasted the economy to expand by 0.9%, but by spring, the figure had grown to 2.2%. Fed Chief Jerome Powell had long considered the January-February surge in consumer prices a temporary phenomenon linked to seasonal adjustments. However, the March reports will surely convince the central bank otherwise. The market is already convinced.

Before the key release, derivatives gave a 50% chance of a federal funds rate cut in June, but after CPI picked up, the odds plummeted to 19%. Moreover, the risks of a Fed rate cut in July fell to less than 50%. Investors are betting on September and are counting on just two interest rate cuts in 2024! Isn't this a reason to buy the U.S. dollar?

The expected scale of the Fed's monetary easing

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Everything that was surging against the dollar is now doomed to fall. The main drivers of the rally in the S&P 500, cryptocurrencies, and commodity assets at the beginning of the year were based on expectations of 6-7 acts of monetary easing by the Fed. Now, only two of them remain. If inflation accelerates once again there will be none left. Such a development is quite possible.

The Fed settled with its dovish stance. It wanted to buy time and see the future dynamics of CPI and PCE, but in the end it got record highs on the U.S. stock market. This weakens financial conditions and contributes to price increases. Simultaneously, oil and gold prices confidently moved higher, which, in the case of oil, creates a tailwind for inflation. Add to this a strong labor market and economy, the Fed may need to resort to actions like bringing back rate hikes instead of cutting them.

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JP Morgan warns that inflation could remain elevated for a longer than expected. Armed conflicts in Ukraine and the Middle East lead not only to disruptions in supply chains but also to an increase in military spending by governments. As a result, the bank does not rule out that the federal funds rate could return above 8%! Let's go back to the 1990s!

Technically, on the EUR/USD daily chart, a selling strategy clearly worked on a break below support at 1.0845. The base of the pin bar was also located there. A breakout beyond the fair value range of 1.0765-1.0915 will be the basis for increasing short positions. Targets are set at 1.0600 and 1.0500 levels.

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