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Dollar Surges as Hot CPI Revives Fed Hike Bets

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EUR/USD turns bearish after decisive break below key support

The dollar had a stellar week against the euro and other majors as inflationary pressures sent the probability of a rate hike by the end of the year higher. The US Core Consumer Price Index (CPI) exceeded expectations, posting a 0.4% increase from last month’s 0.2%, and the yearly CPI increased to 3.8%, higher than the 3.7% forecast and the previous 3.3%.

The chances of a rate cut this year are close to zero, while the chances of a hike have increased to 39% for the December meeting, according to the CME FedWatch tool.

Of course, a lot can change until December, and it will be interesting to see how the new Fed Chair, Kevin Warsh, tackles the inflation problem. On Wednesday, the US Senate confirmed Warsh as the new head of the Federal Reserve, but the vote was very close, 54 – 45. President Trump pressured the former Fed Chair, Jerome Powell, to cut the rates, and Warsh was viewed as the one to do just that. However, with the current state of inflation, a rate cut is not justifiable.

Economic Calendar Highlights

The most important event of the week will be the release of the FOMC Meeting Minutes, scheduled for Wednesday at 6:00 pm GMT. The document provides insight into the reasons that determined the latest interest rate vote, but it can also contain clues about monetary policy going forward.

The US Manufacturing and Services PMIs will be released on Thursday at 1:45 pm GMT. These are surveys of purchasing managers from the respective sectors and provide a bird’s-eye view of the overall business conditions. The PMIs are leading indicators of economic health, with a medium impact on the market.

On Friday, traders will focus on the UK Retail Sales, released early at 6:00 am GMT, and later, on the US Revised Consumer Sentiment Survey, scheduled for 2:00 pm GMT. These are not high-impact indicators, but considering the lacklustre week, their importance may be heightened.

Technical Outlook – EUR/USD

Last week’s price action took the pair close to the support at 1.1600, and this puts the dollar bulls in control. The euro bulls could not push the pair to the top of the range, at 1.1900, and the break of 1.1700 shows that lower prices will follow.

If the pair descends below 1.1600 this week, we can expect to see a drop to the lower part of the range, at 1.1400. This would be a longer-term development, not likely to happen in a week’s time. It is possible to see a pullback at 1.1600 if the lower Bollinger band provides support.