EUR/USD updated its six-month price high at the start of the US session, exceeding the 1.0650 mark for the first time since June. The US dollar index collapsed to 103.37, losing more than 1% on a daily basis. The dollar plunged throughout the market, reacting to the disappointing (for the greenback) report on inflation growth in the United States for November. Just like a month ago, the inflation report turned out to be in the red zone: all components fell short of the forecast levels, thereby confirming the slowdown in US inflation. Now we can be confident about the current trend. In November, some representatives of the Federal Reserve urged the market to not make hasty conclusions based on one report. Now this argument has offset itself, since for the second time in a row, the most important report for the Fed comes out in the red zone.
The US CPI growth report is important in itself, but under the circumstances it is especially significant, especially for those who trade dollar pairs. As we all know, on Wednesday, the Fed will announce the results of its last meeting for 2022. In anticipation of this event, there was a discussion among experts about the further pace of tightening of the Fed's monetary policy. Analysts also discussed (and are still discussing) another burning question, which is whether the US central bank is ready for an early pause, thereby bringing the final point of the current rate hike cycle closer.
The general leitmotif of expert discussions is dovish in nature. Markets are waiting for the Fed's pivot: according to some currency strategists, members of the Fed will only loosen the "gas pedal", according to others, they will soon step on the "brake pedal". The latest inflation report tipped the scales towards a more dovish scenario. If before the release of the CPI growth report, some experts theoretically assumed the probability of a 75-point rate hike following the December meeting (the CME FedWatch pointed to a 20% chance of that), now there is no doubt that the central bank will limit itself to a 50-point hike. Strong inflation in November would not automatically reverse the situation, but it would give the hawkish wing of the Fed some arguments to defend its position. However, the latest report put a bold end to that issue: a 50-point hike at the end of the December meeting is a done deal that is being played out by the market right now.
Let's consider the structure of a high-profile report. The consumer price index in annual terms increased 7.1% from a year ago, with a forecast of a slowdown to 7.3%. In this case, we can talk about a trend: the indicator has been declining for the fifth consecutive month after reaching a peak at 9.1%. The all items index rose just 0.1% from the previous month (forecast at 0.3%).
Excluding volatile food and energy prices, the so-called core CPI showed similar dynamics. It fell short of the forecast level, increasing by 0.2% on the month (forecast at 0.4%) and by 6% on an annual basis, while most experts predicted an increase to 6.5%. Let me remind you that a 40-year high was recorded in September – the base index jumped to 6.6%. Since that moment, the indicator has been slowly but consistently decreasing.
Take note: the growth rate of energy prices in November slowed to 13.1% after a jump of 17.6% the month before last. In particular, gasoline rose by 10.1% (a month earlier by 17.5%), electricity by 13.7% (in October by 14.1%). The cost of food increased by 10.6%. At the same time, used cars fell by 3.3%, whereas in October they rose by 2%.
What does the report say? Actually, it solved only one dilemma — regarding the pace of the Fed's rate hikes. Obviously, the pace will slow down starting with the December meeting: the era of 75-point hikes is over. But other aspects of the December meeting are still debatable. In particular, we are talking about the final point of the current cycle of tightening the monetary policy. Let me remind you that on the last day of November, Fed Chairman Jerome Powell made several significant statements that were actually ignored by the market. Speaking at an economic forum at the Brookings Institution in Washington, Powell said that the issue of slowing down the pace of tightening is "far less significant than the question of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level." Powell also stressed that inflation in the United States is "still too high," so the Fed has "a long way to go in restoring price stability." Please note that Powell announced "unacceptably high inflation" after the release of October data on CPI growth in the United States.
Thus, the inflation report increased the pressure on the greenback, but we should not "bury" the dollar for good. If the dovish expectations (which have increased significantly after the latest report) are not justified (in terms of the Fed's future prospects), dollar bulls may remind themselves again, and the EUR/USD pair may return to the area of 4-5 figures. Therefore, it would be wise to make trading decisions after the announcement of the results of the Fed's December meeting.