The euro's white streak seems to have ended and, I must say, did not last long. Traders of the euro once again plunged into reality, in which the EUR/USD pair was below parity. What to expect in the near future and does the euro have a chance of rebounding?
US inflation caught the markets by surprise. Investors relaxed a bit, expecting further price cuts. In general, inflation continued to slow down, although at a slower pace compared to the consensus forecast. An important component and reason for pessimism was the growth of some inflation levels, which means that the Federal Reserve will continue to aggressively tighten policy – raising the rate by 75 bps is the lowest that the central bank can do in September. Of course, this will raise the dollar even higher to the detriment of the euro.
Earlier, the technical picture for the euro indicated a loss of bearish momentum. Above 1.0000, the quote may target 1.0050, then 1.0080 and 1.0100.
If bulls fail to stabilize parity, then additional losses in the direction of 0.9950, 0.9900 and 0.9865 are likely to follow.
A lot of factors and a combination of circumstances helped the EUR/USD exchange rate to rise above the 1.0200 mark at the beginning of the week. However, judging by how quickly the euro had to return to where it came from, traders may have misunderstood the prospects for interest rates in the US and the dollar.
So, what the markets are seeing now: core inflation jumped in August, while the overall indicator fell less than expected. The Fed is in a desperate situation not because it does not do enough. The central bank is inclined to do even more against all odds and to the detriment of the economy. Coping with inflation will not be as easy as it may have seemed to market players, and they are only now beginning to understand this.
Officials of the US central bank have made it clear in recent speeches that even if inflation continued to fall in August, there would still be a risk of another significant step of 0.75% bps next Wednesday. Tuesday's data may indicate that there is a risk of something much more significant.
Traders can only guess about this now, they will not hear any hints until the next Fed meeting, since a week of silence has begun and the members of the central bank will not comment on what is happening with macro data in any way.
The markets will re-scroll and analyze the Fed's past statements.
"The clock is ticking, and as I mentioned, the longer inflation stays well above the target, the more fear there is that the public will naturally start taking higher inflation into account when making economic decisions, and our job is to make sure that doesn't happen," Fed Chairman Jerome Powell said last week.
He also noted that the key role will be played by "the expectations of the population regarding inflation. This is a kind of fundamental basis of the structure. It is important that inflation expectations remain well anchored."
Meanwhile, all the officials of the central bank have recently expressed concern about the growth of short-term inflation expectations. This can affect long-term expectations for the worse. It is possible that the target 2% will also have to be revised sooner or later.
The verdict of the Fed members at the moment is as follows: until they see a significant and sustained slowdown in the growth of core prices, the adoption of further significant steps to tighten monetary policy will continue. The markets need to understand and accept this.
All this directly affects the positioning of the European currency. No matter what positive internal factors or news, the American component outweighs everything.
The Fed's September decision may have a different impact on market sentiment, which has already been under significant pressure this year. They could fall even further with any significant rate hike.