FX.co ★ The US dollar will grow weaker

The euro and the pound rose, while the dollar continued to fall after the Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve's preferred indicator, showed inflation continues to slow at a fast pace but fell below economists' expectations. This confirms the Fed's pivot toward lowering interest rates in 2024.

The so-called core PCE price index, which excludes volatile categories such as food and energy, advanced 3.2% year-on-year in November, after increasing 3.4% in October, and a revised downward growth in October by 0.1%. Obviously, there is no sign of inflation accelerating, and if the December data also demonstrate mixed dynamics, this will fuel the bearish momentum for the dollar.

Friday's figures support market expectations of a Fed rate cut in the first quarter of 2024. A year ago, the Fed's core PCE inflation gauge rose by 3.2%. On an annual basis for the past six months, the core measure increased by only 1.9%, falling below the Fed's target level for the first time in over three years.

The PCE Price Index fell by 0.1% compared to October, marking the first decrease since April 2020. The index also increased by 2.6% compared to 2022, the smallest rise since February 2021.

Following this, the dollar index fell by 0.3% to its lowest level since July, demonstrating weakness against almost all major currencies.

It is clear that a lot of investors will bet on the dollar's decline, as recent economic reports have shown a decline in inflation and a cooling labor market. In addition, we have the clearest signal from the Fed about the end of the aggressive rate-hiking campaign, with a series of rate cuts in 2024, the chances of the dollar making up for lost ground are quite slim.

Philadelphia Fed President Patrick Harker said last week that the U.S. central bank should start cutting interest rates. However, many leading Wall Street economists believe the Fed will postpone rate cuts until mid-2024, contrary to market expectations.

Meanwhile, the euro has gained significantly against the dollar recently, as the Fed's dovish stance contrasts with the views of European Central Bank policymakers, who recently cautioned investors against betting on an earlier shift to a dovish policy. The euro has added about 3% against the US dollar this year.

Meanwhile, the Swiss franc jumped to its highest level against the dollar since 2015 when the Swiss National Bank abandoned its policy of pegging the currency. It also reached nearly a 9-year high against the euro. This year, the franc outpaces all its counterparts in the "Big Ten" currencies. Investors prefer it as a stronger national currency.

Data on US consumer spending and income were released on Friday. November had a 0.4% increase in nominal income and spending, and wages, excluding inflation, jumped by 0.6%, which is also the highest level in 8 months. The personal savings rate increased to 4.1%. Adjusted for inflation, spending on goods increased by 0.5%, and spending on services rose by 0.2% for the third consecutive month.

As for the technical picture of EUR/USD, the bulls maintain control of the market and are now aiming for the level of 1.1010. From there, it can climb to 1.1040, but doing so without support from major players will be quite problematic. The ultimate target is the 1.1075 high. In case the pair falls, I expect major buyers to be active around 1.0970. If there is no significant presence there, it would be good to wait for an update of the 1.0940 low or open long positions from 1.0900.

As for the prospects of the GBP/USD pair, despite the sharp drop in the pound, the bullish market persists. Consolidation above 1.2690 will make it possible for the pair to rise and maybe even surge to 1.2730,as well as retest the 1.2760 high. After that, we can talk about a more pronounced upward surge towards 1.2790. In case the pair falls, bears will try to take control around 1.2655. If they succeed, a breakout of the range will hit bullish positions, pushing GBP/USD towards the low at 1.2615 with the prospect of reaching 1.2580.