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Inflation in the US and another Fed decision

Overview of the PCE index of business activity in the USA for October and the index of business activity in the manufacturing sector from ISM

  • The core US CPI is likely to signal an easing of pressure.
  • The US ISM Manufacturing PMI is expected to fall into contraction territory.
  • EUR/USD may return to the 1.0500 price zone once the dust settles.

December will start on a high note in the United States, as the country publishes data on the Personal Consumer Expenditure Price Index (PCE), the Fed’s favorite measure of inflation, and the Institute for Supply Management (ISM) releases its November manufacturing PMI.

Updates on inflation and business growth will be key ahead of the US Federal Reserve’s final decision scheduled for Dec. 14.

Core PCE inflation, which excludes volatility in food and energy prices, is expected to rise by 0.3% m/m, and the annual value is expected at 5% from 5.1% in November. In contrast, ISM manufacturing PMI is expected to fall from 50.2 in October to 49.8.

Signs of slowing inflation will be encouraging, but not surprising. No confirmation that the economy has contracted. However, a manufacturing PMI below 50 is sure to hurt the US dollar, while a higher-than-expected reading could support a battered US currency.

Another decision of the US Federal Reserve

The US Federal Reserve (Fed) hinted at a possible easing of the tightening pace. After raising rates by 75 basis points for five consecutive meetings, the Fed is now expected to pull the trigger by a modest 50 basis points. Data obtained from the CME FedWatch tool shows that the probability of this outcome is approximately 70%, and the benchmark rate is in the range of 4.25% to 4.5%.

Easing price pressures and fears that higher rates will slow economic progress could easily explain the upcoming decision, although it should be noted that Fed officials will continue to prioritize inflation. If the relevant data surprises positively, market participants could raise rates another 75 basis points and push the US dollar higher in a risk-averse environment, which could send equity markets into a selling spiral. A worse-than-expected ISM manufacturing PMI should exacerbate the bleak scenario.

A weaker-than-expected core PCE along with an ISM manufacturing PMI of 50 or higher should be encouraging. Stock markets are likely to rise and the US dollar is likely to fall against all of its major competitors.

Possible EUR/USD scenarios

The EUR/USD pair peaked at 1.0496 earlier in the week, the highest level since last June. The pair bottomed at 1.0318 on Tuesday, rebounding from that level and now targeting 1.0400.

From a technical standpoint, risk is skewed to the upside, although the lack of activity these days has left the daily chart with neutral or bullish content. The price of the EUR/USD pair remains near the bearish 200-day simple moving average (SMA) and has not been able to overcome the moving average since June 2021. , reflecting the power of buyers. The Momentum indicator is moving south above its midline, but the Relative Strength Index (RSI) resumes growth in the 61 area, which also reflects the dominance of the bulls.

The EUR/USD pair could regain its bullish momentum if it closes above the 100-day moving average on Wednesday and challenges the weekly high if US data boosts optimism. A slide below 1.0300, on the other hand, should open the door for a deeper correction down to 1.0240, the Nov 21 daily low. Further decline seems unlikely, although if the pair drops lower, there will be a new test of parity on the table.

Valeria Bednarik, FXStreet

Valeria Bednarik has extensive experience writing technical and fundamental analysis, with a particular focus on currencies and commodities. His short but precise articles cover various aspects of the market with a didactic approach adapted to the level of knowledge of any reader. She graduated from the Catholic University of El Salvador, Argentina with a degree in taxation and cost management.

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The opinions expressed here are solely those of the author and do not necessarily reflect the views of Forex Quebec. Every investment and trading move involves risk, so you should do your own research when making a decision.

Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or solicitation to buy or sell foreign exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not warrant its accuracy or completeness and shall not be liable for any direct, indirect or consequential damages that may result from anyone relying on such information.

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