Before we start, why has it fallen so much?
The influence of price levels has been one of the most determining factors that led the EURUSD exchange rate to fall to levels not seen since the year 2000 when the community currency itself was established as legal tender. Because the consequences of an expansive policy before and during the coronavirus crisis ended up inflating the US price basket to 9.1%, a level not seen since 1981.
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CPI, source: Tradingeconomics, U.S. Bureau of Labor Statistics
And to counter inflation, the Fed's main monetary policy tool is to raise interest rates, because that's the fastest move. There is also the possibility of drastically reducing your balance, called Quantitative Tightening or QT. This flooded the bond markets, causing a yield curve inversion and consequently an appreciation of money that pushed the EURUSD rate to $0.954.
Change of trend and recovery of levels (parity)
But the trend began to reverse when the publication of the CPI for July 2022 offered us for the first time a drop in the main price level from 9.1% to 8.5%. Although the exchange rate continued to fall due to the fact that the base data, which excludes energy and transportation prices, continued to grow by absorbing the structural nature of the basket of goods that accumulated the impact of prices precisely for transportation and the fuels.
CPI, source: xStation
This change in trend was confirmed together with the Base CPI data for October, which, with some delay, finally showed a consistent decline together with the falls in the general CPI, which has continued to fall since then.
CPI Base, Source: xStation
The market's reaction is clear, since then, they have been buying the Fed's monetary policy restraint precisely because according to the inflation data, the interest rate hikes are having an effect. And leading the EURUSD exchange rate to exceed $1,076 recently.
What will the EURUSD do now?
EURUSD chart, D1 interval, Source: xStation
The main scenario is that the CPI data (Principal and Base) shows a correction again and therefore the increases that investors have been discounting during this months are maintained.
However, bad CPI data could cause some pessimism in the price and setbacks in the EURUSD rate due to the appreciation of the US dollar. Even so, the trend is clear and the small corrections could translate into a consolidation in the price maintaining the bullish trend, which began precisely after the first minor publication of the IPC Base published on November 10, 2022.
Dario Garcia,
XTB Spain
