Limited Strength for the Dollar After Higher Than Expected American Inflation

Although USDCAD has continued its extremely strong gains late this week, other majors with the dollar haven’t shown a strong reaction to recent news. This article summarises 10 October’s inflation data from the USA and its possible influence on the upcoming decision of the Federal Reserve (‘the Fed’) then briefly looks at the charts of EURUSD and GBPUSD.

While 2.4% annual headline inflation in September was slightly higher than the consensus, it still fits with the overall downtrend of the rate of inflation:

Petrol, fuel oil and used vehicles have been some of the biggest drivers of declining inflation in recent months. Part of the reason for the higher result seems to be oil’s strong gains in the last fortnight. Annual core inflation meanwhile moved up unexpectedly to 3.3%.

As of right now, inflation seems unlikely to resurge unless the Fed drastically changes course and doubles down on cutting rates as quickly as possible. The overall economic situation in terms of job data and GDP definitely doesn’t support that. On the contrary, the probability of only a single cut next month has increased significantly in the last fortnight:

CME FedWatch shows a large majority expecting a single cut on 7 November and even a small minority expecting no change. This comes after increasing concern about the possible resurgence of inflation recently and dissenting comments in the latest minutes of the Fed against the double cut in October.

One way or the other, it seems practically guaranteed that the funds rate will remain higher than annual non-core inflation at least for the next several months unless something truly amazing happens with supply chains, demand or the price of oil. A relatively less dovish Fed should in theory support the dollar and create headwinds for gold.

Conversely, the upcoming elections in the USA could disrupt the current impression completely. Kamala Harris’ lead in national polling has decreased slightly in October so far to about 2.5%, but with nearly a month to go until election day polling could still shift. Broadly speaking, Harris’ election would be negative for the dollar and Donald Trump’s positive, but the actual effects depend on sentiment and data too.

Euro-dollar, Daily

Euro-dollar didn’t react strongly to the latest inflation data from the USA, but this is partially a result of the technical situation and monetary policy in the eurozone. The European Central Bank is likely to cut its benchmark rate to 3.4% on Thursday 11 October.

10 October’s tail isn’t necessarily a rejection of $1.09; it might just be a pause. EURUSD is quite strongly oversold after having retreated with high momentum so far in October from $1.12. It’d be pretty normal to see a consolidation or maybe a small bounce first if the price were to continue lower.

The first important dynamic support is the 200 SMA around $1.088 and below this the strong static support will probably be the 100% monthly Fibonacci retracement around $1.07. $1.10 is likely to be the main resistance for the next few days and possibly longer unless there’s a strong fundamental driver.

Cable, Daily

GBPUSD has moved somewhat similarly to EURUSD recently with a few notable exceptions. The downward movement has been more vigorous here due to the simultaneous shifts in central banks’ outlooks: the Bank of England could start cutting faster according to some expectations while it seems clear now that the Fed won’t cut more than four times in total by the end of the year.

The technical picture probably doesn’t support immediate further losses. The price is just above the important psychological area of $1.30 and close to the 100% monthly Fibonacci retracement (matching the 61.8% weekly) with clear selling saturation but not especially high volume of selling.

The British job report will come out on Tuesday 15 October and inflation the following day. These releases, especially the latter, are centrally important for determining whether cable might settle into a range or try to bounce in the next few days. A sustained movement below $1.30 seems unlikely for now but it’s possible if the data on 15 and 16 October are notably disappointing.

This article was submitted by Michael Stark, an analyst at Exness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.