FX.co ★ Dollar is slowing down. Rally end dates looming

Despite the current weakness, the dollar continues its ascent. A short-term greenback rally remains likely, which means the euro and pound are in danger of fresh lows. The question is how high can the dollar rise, will it reach the index at 114.00?

The next event capable of giving strength to the dollar or, on the contrary, tripping it up and letting go down, will be the publication of inflation. However, this event is unlikely to become a dollar driver that determines its trend for the long term. The behavior of traders will largely depend on the indicators of November and December inflation. Their future trading pan will be based on this data and the unemployment rate.

As the unemployment rate rose unexpectedly from 3.5% to 3.7% in October, the markets will closely monitor this indicator of the US labor market. Rising unemployment in combination with decelerating inflation threatens to weaken the dollar. And no wonder, as this development would hint at a slower Fed rate hike of around 50bp, and then even weaker until the cycle is completed.

The Fed has nothing to worry about at the moment. The labor market looks quite viable. Nevertheless, there is a certain limit in numbers, which will make the regulator's officials wary and slow down the monetary pace.

There is reason to believe that this limit will be an increase in unemployment above 4%. If this indicator continues to rise in November, market players will be cautious. It will be much more difficult for the Fed to decide on a rate hike. Already in December, the Central Bank may raise the rate by 25 bp or abstain.

This is grounds for reflection in the longer term. As for the next few days, the markets will have the opportunity to analyze inflation figures from different angles. The inflation rate is expected to fall from 8.2% to 8%. If the indicator falls below 8%, markets may begin to count on a lower rate of tightening of the Fed's policy.

Even though the dollar is apparently not yet ready to turn its trend down, the final phase of its multi-month rally is now likely to begin.

The US Central Bank tightening cycle is nearing completion. The consequence of this is limited scope for further increase in the expected spread in interest rates in favor of the dollar. However, this does not mean that the dollar will go down, it will stop growing. A reversal should occur only after the Fed has completed the cycle.

All this gives some hints on the outlook for the GBP/USD pair, which has been declining since mid-2021 due to a significant increase in the US currency.

Since the beginning of 2021, the dollar has appreciated by about 15%, which corresponds to the fastest growth on record.

GBP/USD's downtrend ended with a record low of 1.0354 on September 26, after a significant decline, which prompted a number of analysts to conclude that the rate will continue to fall towards parity, as in the situation with the euro.

According to Nomura, what is happening with the pound now is most likely a short-term profit-taking, and not a serious reason for optimism. At the same time, there is no good reason to update the lows up to parity. A necessary condition for the fall of the pound is the resumption of the upward trend of the US dollar.

In this regard, many are now wondering where the dollar will go? Has he finished his ascent, or is he just taking a breath before the next dash upwards?

"It is still too early to tell a proper trend reversal and it could still make new highs if the global outlook deteriorates further. However, the scope for further growth is limited. The pursuit of further strengthening of the dollar does not seem attractive in terms of risk-reward ratio," analysts comment.

There's a reason it would be premature to bury the dollar.

"In most previous Fed policy cycles, the dollar continued to rally even after U.S. short-term rates peaked as rising demand for safe-haven currencies led to a stronger dollar," warned Capital Economics.

"With the global economy now clearly slowing down and financial markets becoming more vulnerable, we continue to believe that a similar scenario will play out this time around and that the dollar will continue to appreciate against most major currencies through the end of this year and into the first half of 2023," economists believe.

Capital Economics experts are betting on a further fall in the euro and the pound. They base their forecast on the fact that Europe is in a deeper recession than other major economies, and that the worsening terms of trade in the region continue to weigh on exchange rates.

The end of the dollar strengthening period is likely to be the second half of 2023.

EUR/USD is currently facing strong resistance at 1.0030. Buyers managed to overcome it, now the euro is on its way to test 1.0093, which may lead to breaking through the September top of 1.0197.

As long as the quote is above 0.9850, additional growth is likely. At the same time, in the long term, the bearish view on the euro remains unchanged.