Market Analysis: Dollar Falling Amid Falling Inflation

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Market expectations that the Federal Reserve has completed its rate hike cycle are weighing on the US dollar. Cooler-than-expected US inflation data on Tuesday and Wednesday accelerated market expectations for how soon the Federal Reserve will cut rates. Such a move would weaken major support for the US dollar and could happen as early as the first quarter of next year. Negative dynamics are developing against the backdrop of a weakening US dollar after the publication of inflation data: the October consumer price index fell from 3.7% to 3.2% in annual terms, approaching the upper limit of the US Federal Reserve's target range. In response to this, investors adjusted their forecasts regarding the timing of the launch of the monetary policy easing programme, and the most optimistic experts believe that the regulator could launch it in the first quarter of 2024. The position of the American currency was supported by statistics. Thus, the number of issued construction permits in October increased from 1.471 million to 1.487 million, while analysts expected a slowdown to 1.450 million, and the volume of started construction of houses — from 1.346 million to 1.372 million, with a forecast of 1.350 million.

EUR/USD

According to EUR/USD technical analysis, the EUR/USD pair updates local highs from August 31, testing the 1.0930 mark for an upward breakout. On the downside, immediate support is seen at 1.0843, a break below could take the pair towards 1.0827.

Investors currently expect the ECB to cut interest rates by 100 basis points in 2024. However, representatives of the regulator Robert Holzmann and Joachim Nagel, who spoke last Friday, announced the possibility of another increase in the value if necessary. Macroeconomic statistics from the eurozone, published on November 17, did not have a noticeable impact on the dynamics of the instrument: the consumer price index in October added 0.1% in monthly terms and 2.9% in annual terms, and core inflation remained at 0.2% and 4.2 %, respectively.

The focus of investors' attention today is the October data from Germany on the producer price index. In monthly terms, the figure decreased by 0.1%, in annual terms — by 11.0%, as predicted. Also during the day, the publication of a monthly report from the Bundesbank is expected.

Based on the highs of last week, a new ascending channel has formed. Now the price has moved away from the upper border of the channel and may continue to decline.

GBP/USD

On the GBP/USD chart, the pair is showing active growth, developing the bullish momentum formed in the short term. The instrument is testing the 1.2490 mark for an upward breakout, holding close to the local highs from September 14. In case of a fall, the nearest support is visible at 1.2407, a break below could lead the pair to 1.2378.

More confident upward dynamics are hampered by macroeconomic statistics from the UK. In October, retail sales volumes decreased by 0.3% after -1.1% a month earlier, while analysts expected an increase of 0.3%, and in annual terms the negative dynamics accelerated from -1.0% to -2.7 % with a forecast of -1.5%. Analysts predict that the agency will begin reducing borrowing costs in May or June 2024. Three 25 basis point adjustments are planned by the end of next year.

The focus of investors' attention today will be the speech of the head of the Bank of England, Andrew Bailey, who can share the regulator's plans for the near future.

Based on the highs of last week, a new ascending channel has formed. Now the price is in the middle of the channel and may continue to rise after approaching the lower border.

USD/JPY

On the USD/JPY chart, the pair is declining moderately and is testing the 149.00 mark for a breakdown downwards, updating the lows from October 11. Strong resistance can be seen at 150.11, a break higher could trigger a rise towards 150.62. On the downside, immediate support can be seen at 149.26, a break below could take the pair towards 148.12.

At the end of last week, Japanese Deputy Finance Minister Ryosei Akazawa said that monetary authorities do not focus on any specific yen level when deciding on currency interventions in the market, although analysts suggested that the Bank of Japan could support the rate if the 152.00 level is broken. The regulator's chief Kazuo Ueda said officials would discuss a strategy for transitioning away from ultra-loose monetary policy when sustained achievement of the 2.0% inflation target is close enough, which is expected by fiscal 2025. The first step will be to abandon bond yield curve control and maintain negative interest rates, but for now it is necessary to maintain the current course. At the end of the week, October data on inflation dynamics in Japan will be published: forecasts suggest an increase in the consumer price index excluding food prices from 2.8% to 3.0%.

The downward channel is maintained. Now the price is in the middle of the channel and may continue to decline after approaching the upper border of the channel.

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