Overview of the Dollar’s Performance
Despite the USDCAD showing strong gains late this week, other major currencies against the dollar have not reacted significantly to recent economic news. This article summarizes the inflation data from October 10 in the U.S. and examines its potential impact on the upcoming decision by the Federal Reserve (the Fed). We will also take a brief look at the charts for EURUSD and GBPUSD.
U.S. Inflation Data
In September, the U.S. annual headline inflation rate rose to 2.4%, slightly above the consensus forecast. However, this figure aligns with the overall trend of declining inflation. Key factors contributing to the increase include rising prices for petrol, fuel oil, and used vehicles. The recent spike in oil prices over the past two weeks has also contributed to this outcome. Meanwhile, annual core inflation unexpectedly increased to 3.3%.
Currently, it appears that inflation is unlikely to surge again unless the Fed changes its strategy and aggressively cuts interest rates. The current economic indicators, including job data and GDP, do not support such a drastic move. Instead, the likelihood of a single rate cut next month has risen significantly.
The CME FedWatch tool indicates a large majority anticipating a single cut on November 7, with a small minority predicting no change. This sentiment follows rising concerns about a potential resurgence of inflation and dissenting comments in the Fed’s latest minutes against a double cut in October.
Future Outlook for Interest Rates
It seems almost certain that the funds rate will remain above annual non-core inflation for the next several months unless there are remarkable changes in supply chains, demand, or oil prices. A less dovish Fed is expected to support the dollar, creating challenges for gold prices.
However, the upcoming U.S. elections could significantly alter this outlook. Vice President Kamala Harris has seen a slight decrease in her national polling lead to about 2.5% as of October. With nearly a month until election day, polling dynamics may still shift. Generally, Harris’s election could negatively impact the dollar, while a victory for Donald Trump could be seen as positive. Nonetheless, actual effects will also depend on market sentiment and economic data.
Euro-Dollar Reaction to Inflation Data
The euro-dollar pair did not respond strongly to the recent U.S. inflation data, partly due to the current technical situation and monetary policy in the eurozone. The European Central Bank is expected to lower its benchmark rate to 3.4% on October 11.
The retreat of EURUSD from $1.12 in early October may not indicate a rejection of the $1.09 level but could simply reflect a temporary pause. The pair is currently oversold, which could lead to consolidation or a slight rebound before further declines.
Support and Resistance Levels
Key support levels for EURUSD include the 200 Simple Moving Average (SMA) around $1.088 and a strong static support level near the 100% monthly Fibonacci retracement at approximately $1.07. Resistance is expected around $1.10 in the coming days, unless a significant fundamental driver emerges.
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