In order to understand what will happen in the future, you need to look into the past. During the pandemic, people stayed at home, the demand for goods grew, which led to an increase in their cost. In contrast, the service sector has been hardest hit by the lockdowns, but as soon as they ended, this sector saw a rapid recovery. It is the cost of services that is currently the main driver of inflation in the United States. And the longer this goes on, the higher the stakes will be. All the better for the "bears" on EURUSD.
In the same way that the U.S. had a two-speed economy in 2021–2022 due to the different dynamics of the manufacturing and non-manufacturing sectors, they currently have a two-speed inflation. Fixing problems with supply chains has lowered the prices of goods. On the contrary, Americans, hungry for travel and entertainment due to prolonged sitting at home, have blown up the service sector.
Dynamics of inflation and its components in the USA
It is this sector that generates the largest number of new jobs. Given that it accounts for four-fifths of GDP, it is unlikely that the U.S. will be in a recession in 2023. The Fed can raise the federal funds rate in good conscience, and the U.S. dollar can strengthen.
That's what FOMC officials are saying. According to Richmond Fed President Thomas Barkin, the central bank may have to do more to fight inflation than anticipated. His colleague, Dallas Fed President Laurie Logan, said monetary tightening will take longer than expected. And only Patrick Harker, head of the Federal Reserve Bank of Philadelphia, said that the federal funds rate is approaching a restrictive level. His comments allowed the stock indices and EURUSD to stage a counterattack, which was short lived.
Investors continue to be at the mercy of events related to the Fed and U.S. macroeconomic statistics. I'm worried about how long they will turn a blind eye to other news. From the eurozone? From the camp of the ECB Governing Council? From China? This may happen no earlier than the publication of the U.S. retail sales. After the decline in December, Bloomberg experts expect it to rise by 1.8% MoM in January. If this is the case, the belief that the U.S. economy is not going down but, on the contrary, rising higher will allow further selling of EURUSD.
Ultimately, no one canceled the factor of American exceptionalism, which, coupled with the possibility of raising the federal funds rate to 5.5%, will faithfully serve the U.S. dollar.
Technically, the formation of a pin bar with a long upper shadow, coupled with an unsuccessful test of EURUSD dynamic support in the form of moving averages, which are part of the Alligator indicator, indicate the weakness of buyers. Typically, a test of a pin bar low near 1.0705 is used to form short positions. However, to continue the peak in the direction of 1.058–1.061, the main currency pair must overcome the 1.0695 pivot point.