FX.co ★ EUR/USD. Dollar's comeback

Bulls on the EUR/USD pair were not able to reach the 4th figure at the end of last week. After several attempts to move forward, traders retreated and tried to hold the defense in the range of 1.0300-1.0350. Looking ahead, we should take note that the fundamental picture is gradually forming in favor of the bearish scenario. The dollar is recovering after quite a powerful blow from the U.S. inflation.

The bull's triumph lasted relatively short. Let's take a look at the pair's weekly chart: in late October and early November traders gradually approached the parity level, and sharply moved up last week, impulsively surpassing the 1.0000 level. On the wave of the upward rally, bulls managed to surpass over 400 points and reached 1.0481. But the bullish rally ended. From a technical point of view, the bulls could not overcome the upper line of the Bollinger Bands indicator on the daily (and weekly) charts, which corresponds to the 1.0480 target. Traders needed an appropriate reason in order to overcome this barrier, which would allow them to go in and settle in the area of the 5th figure. But the fundamental background has changed in favor of the US dollar.

Let me remind you that the greenback started to plunge across the market after we received the US inflation report that showed growth, which reflected an unexpected slowdown in the US consumer price index. The decline in the overall CPI is already showing a downward trend, with the indicator sliding for the fourth consecutive month. The core index fell to 6.3% after reaching a 40-year high of 6.6% in September. Immediately after this report was released, most foreign exchange market experts revised their forecasts on the possible outcome of the December FOMC meeting. While before the report was released the probability of a 75-point rate hike was at 48-50% (according to the CME FedWatch Tool), after the release it fell to 15%.

The dollar was under more pressure due to the external fundamental background. The "peaceful" outcomes of the G20 summit, the meeting of the US and Chinese leaders (and subsequent statements of a complementary nature), the easing of quarantine measures in China (which was interpreted as a gradual departure from the COVID zero-tolerance policy) - all these fundamental factors raised the demand for risky assets, while the safe dollar was out.

As of today, the general information picture has changed. To be more precise, traders of dollar pairs switched to classic fundamental factors, and especially - to the rhetoric of the Federal Reserve representatives. And this circumstance turned out to be in favor of the greenback.

By and large, the position of the Fed members has not changed since the central bank's November meeting. Even at the final press conference (i.e., November 2), Fed Chairman Jerome Powell warned market participants that the pace of tightening in December or February would slow down. But he added that the pace of rate hikes "isn't that important" because the current cycle will peak at a higher level than previously expected (that is, above the 5% mark). Powell also said that the Fed would remain hawkish even when inflation in America is slowing.

However, at the end of the last inflation report the traders of dollar pairs concentrated only on the fact of the slowdown in the rate hike, while all the other (above) theses of Powell remained, as it were, in the shadows. Whereas recent speeches by Fed officials "reminded" market participants that the pace of rate hikes is really of secondary importance, given the general hawkishness of the US central bank.

For instance, the head of the St. Louis Fed, James Bullard, said this week that the inflation data for October was "somewhat encouraging - although things might go differently next time, inflation is still strong." Some of his colleagues (notably Susan Collins, head of the Boston Fed, and Lisa Cook, a member of the Fed Board of Governors) voiced a similar stance, warning against drawing conclusions from a single inflation report.

But Christopher Waller (a member of the Fed Board of Governors) bluntly urged traders not to exaggerate the Fed's decision to slow the pace of monetary policy tightening. He said that markets should now pay attention to the "end point" of a rate hike, rather than the pace of it. At the same time, he noted that the end point is probably "still very far away".

And we did not have to wait too long for its result. For example, most economists polled by Reuters said that a longer period of tightening and a higher final rate "are the main factors that will support the dollar for the foreseeable future".

In other words, the dollar's main advantage is that the central bank has expressed a willingness to expand the horizon beyond the 5% target. And as of today, none of the Fed representatives has denied the intentions.

Do recall that following the Fed's November meeting, Goldman Sachs analysts updated their three-month forecast for the EUR/USD pair: the price will decrease not to the area of the 97th figure, but to the area of 0.9400. In their opinion, the central bank actually admitted that the monetary policy easing measures are a "moving target", which is moving higher and higher.

Right now it is certainly too bold to talk about the 94th figure from the height of 1.0350. But we can assume that in the medium term, the pair can fall at least to the support level of 1.0210 (the Tenkan-sen line on the daily chart). If the bears overcome this barrier, it will only be a matter of time until the price falls to the parity level.

Thus, in my opinion, short positions on the pair look more attractive and justified. The first bearish target is 1.0210, the main (but not the final) target is 1.0000.