The upcoming trading week will be crucial for traders of dollar pairs. By its end, the US dollar will either resume its upward move or weaken further.
To recap, last week, the EUR/USD pair tried to settle within the 1.04 level but failed. The closing price practically coincided with the opening price (1.0586; 1.0570). The US labor market report played a role in undermining the dollar, reflecting a decrease in the inflationary indicator (average wage growth at 4.2%, the lowest rate since August 2021).
The wage growth gauge became another inflationary indicator that was not on the greenback's side. Before that (at the end of September), the core PCE index was published, which also showed a downtrend (down to 3.9%). As a result, the probability of a rate hike at the next meeting in November has fallen to 27% (according to the CME FedWatch Tool). The US dollar reacted accordingly: at the end of Friday's trading, the US Dollar Index fell to 105.78 (while the weekly high was at 107.04). The key releases of the upcoming week will determine the dollar's direction in the medium term, as they will ultimately decide the fate of the November FOMC meeting.
So, the next few days will be "under the sign of US inflation." The September Consumer Price Index, Producer Price Index, Import Price Index, and the University of Michigan Consumer Sentiment Index will be published. In addition, next week will see the release of the minutes from the September FOMC meeting, which could also trigger some volatility in the EUR/USD pair.
But let's get back to inflation. On Wednesday, October 11, we will learn the September Producer Price Index. Over the past year, the index has been declining actively: in June 2022, it stood at 11.3% YoY, but by June 2023, it was at 0.2%. However, the index started to rise again (it increased to 0.8% in July and 1.6% in August). This indicator is expected to remain unchanged at 1.6% YoY in September.
However, the primary focus will be on the key release of the week: the Consumer Price Index (CPI), scheduled for Thursday, October 12th. To recap, the CPI had been on a steady downward trend since June 2022, reaching 3.0% in June. However, it started accelerating again, reaching 3.2% YoY in July and 3.7% in August. According to most experts' forecasts, in September, the CPI is expected to edge down to 3.6% YoY. If, contrary to expectations, the index accelerates once more, the dollar will receive significant support, signaling a solidified trend. However, forecasts currently suggest the opposite.
The core Consumer Price Index, which excludes food and energy prices, is also expected to show a downtrend. This has already been established, with the indicator consistently decreasing over the past five months. September is expected to be the sixth consecutive month to witness a decline, with the core CPI projected to reach 4.1% YoY (the lowest value since October 2021).
On Friday, October 13th, we will learn about the Import Price Index dynamics and the Consumer Sentiment Index from the University of Michigan. Both indicators are expected to demonstrate a downtrend. In particular, the Import Price Index is expected to fall to -3.1% YoY, while the Consumer Sentiment Index is projected to drop to 67.5 points, marking the third consecutive month of decline.
In conclusion, if preliminary forecasts hold true, the inflation reports will not support the US dollar. Even if they meet the expected levels, let alone fall into the red zone, the chances of a Federal Reserve interest rate hike in the November meeting will decrease almost to zero. Consequently, the dollar will be under pressure amid waning hawkish expectations.
The minutes from the Fed's September meeting (Wednesday, October 11th) may provide some support for the greenback, albeit temporarily. As a reminder, following the latest Fed meeting, central bank officials updated their dot plot, indicating that 12 out of 19 committee members envisioned another rate hike by the end of the current year. However, let's recall Fed Chair Jerome Powell's words about the US central bank acting "very carefully" and taking into account the current economic situation. Therefore, a hawkish minutes is unlikely to boost the dollar if the aforementioned reports meet or exceed expectations.
We can't ignore recent events in Israel when considering the prospects for the US dollar's rise or fall. These events may trigger a surge in risk-averse sentiments in financial markets, indirectly impacting the dollar's positions. It's difficult to predict the course of events in the Middle East. Regardless of the specifics of what's happening, one can anticipate a possible reaction in the oil market: crude oil prices may start rising again.
In turn, the dollar will experience increased demand not only as a safe-haven asset, but concerns about accelerating inflation in the US amid rising oil prices will push the greenback higher, including against the euro. In other words, Israel may play the role of a "black swan" for currency market traders. Classical fundamental factors, including inflation reports, may take a backseat, with investors focused on events in the Middle East.
Given these circumstances, it's still early to write off the dollar, even with relatively weak forecasts regarding US inflation growth. The situation remains unpredictable (news flows change rapidly), so it may be prudent to adopt a wait-and-see approach for the EUR/USD pair for now.