November 11, 2021 14:48:50
FX volatility had been fairly subdued recently after last week’s central bank meetings. But all that changed yesterday. The multi-decade high CPI data offered more ground to Fed hawks. It also reinforced the big differences in the US and eurozone economies. The potential moves of the respective central banks towards policy normalisation should highlight this going forward.
Price increases are becoming more broad-based in the US. Wage growth is rising while housing costs are becoming another potential signal of more persistent inflation. Some analysts are pointing to a possible 7% y/y headline print in the coming months.
Will this all qualify for a “change in the economic outlook”? That means the Fed will finish tapering (and potentially rate rises) earlier than planned. This should support the dollar going forward, especially against low yielders like the euro. Liquidity issues and bullish seasonal patterns offer more tailwinds for the greenback.
The dollar hit 16-month highs this morning on bets that the Fed will need to tighten monetary policy. The market has priced in three rate rises next year. It has brought forward the first full 25bp move to the Fed’s July meeting from September previously.
EUR/USD 5-month downtrend continues
It’s worthwhile looking at longer-term charts to see major trends in action. We can see on the weekly that prices topped out above 1.22 in May. Since then, we’ve been in a descending bear channel. Recent failure from the downtrend in June below 1.17 warned of more weakness to come.
The dramatic fall yesterday broke through a key support zone around 1.1495/1.1524. This includes the March 2020 spike high and the 50% retracement of the 2020/2021 bull trend. The 200-week moving average also sits above here at 1.1563.
If we consolidate below this zone on the week, bearish momentum should trigger the next leg in the core downtrend. Support is seen at the figure (1.14) and then 1.1377/70. The next long-term Fib level resides at 1.1290. The support zone now acts as resistance with 1.16 above that.
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