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Unlocking the Secrets of the US Dollar: How CPI and the Fed’s Decision Will Impact EUR/USD, USD/JPY, and GBP/USD

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US DOLLAR FORECAST – EUR/USD, USD/JPY, GBP/USD

  • The U.S. dollar is likely to experience increased volatility this week, with several high-impact events on the economic calendar
  • Market focus will be on U.S. inflation data on Tuesday and the Fed’s monetary policy announcement on Wednesday
  • This article examines the technical outlook for EUR/USD, USD/JPY and GBP/USD, discussing critical price levels to watch in the coming days.

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The week-ahead economic calendar will be packed with high-impact events for the U.S. dollar, but the most important ones that may help define its near-term path will be the November U.S. consumer price index report to be released on Tuesday morning and the Federal Reserve’s monetary policy announcement scheduled for Wednesday afternoon.

Over the past month, the Fed’s interest rate outlook has shifted in a dovish direction, with markets pricing in about 100 basis points of easing over the next 12 months. Although recent data, such as last month’s employment numbers, have been strong and inconsistent with an economy in urgent need of central bank support, traders have held firm in their belief that aggressive cuts are just around the corner.

Projections, however, could become less dovish in the coming days if the latest inflation figure surprises to the upside or displays limited progress towards the Fed’s 2.0% target. In terms of estimates, November headline CPI is forecast to have slowed slightly to 3.1% y-o-y from 3.2% y-o-y previously, while the core gauge is anticipated to remain steady at 4.0% y-o-y.

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INCOMING US DATA

Source: DailyFX Economic Calendar

The December FOMC gathering may be another driver for the reassessment of policy prospects. Although officials are seen holding borrowing costs unchanged when they end their last meeting of the year on Wednesday, they may be inclined to push back against Wall Street’s dovish expectations to prevent financial conditions from easing further.

If the FOMC resists pressure to pivot, comes out swinging and pledges to keep interest rates higher for longer in a convincing manner, U.S. Treasury yields are likely to push upwards, reversing part of their recent pullback. This scenario will be quite bullish for the U.S. dollar, paving the way for further recovery heading into 2024.

With the significant relaxation of financial conditions posing a threat to ongoing efforts to restore price stability and the U.S. economy holding up remarkably well against all odds, the stage seems set for a potentially hawkish outcome at the December FOMC conclave. Whatever unfolds, increased volatility is anticipated in FX markets in the days ahead.

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EUR/USD FORECAST – TECHNICAL ANALYSIS

EUR/USD rallied vigorously last month, but has sold off in recent days, with prices slipping and closing below the 200-day moving average last week – a bearish technical event. If the pair deepens its pullback in the coming days, a retest of the 50-day SMA could come any minute. Continued weakness may shift focus towards trendline support near 1.0620.

Conversely, if EUR/USD stages a turnaround and charges higher, technical resistance is visible near 1.0820, but further gains could be in store on a push above this threshold, with the next area of interest at 1.0960, the 61.8% Fibonacci retracement of the July/October decline. Continued strength may catalyze a retest of November’s highs.

EUR/USD TECHNICAL CHART

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EUR/USD Chart Created Using TradingView

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USD/JPY FORECAST – TECHNICAL ANALYSIS

The Japanese yen appreciated significantly last week on speculation that the Bank of Japan would end its policy of negative rates soon, with USD/JPY falling sharply before regaining some ground after bouncing off its 200-day simple moving average. If the rebound extends over the next few trading sessions, resistance appears at 146.00, followed by 146.90-147.30.

On the other hand, if downward impetus resurfaces and sparks new losses for the pair, the 200-day is likely to be the first line of defense against a bearish assault and 141.75 thereafter. USD/JPY may find stability in this region during a pullback before mounting a comeback; however, in the event of a breakdown, the focus turns to 140.70, then trendline support at 139.50.

USD/JPY TECHNICAL CHART

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USD/JPY Chart Created Using TradingView

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GBP/USD FORECAST – TECHNICAL ANALYSIS

GBP/USD has trended lower over the past few trading sessions after failing to take out a key ceiling near 1.2720, which corresponds to the 61.8% Fibonacci retracement of the July/October decline. Should losses accelerate in the coming week, support stretches from 1.2480 to 1.2455, where the 200-day SMA converges with a short-term rising trendline. On further weakness, the focus shifts to 1.2340.

Conversely, if cable manages to rebound from its current position, overhead resistance is situated around the 1.2590 mark. To rekindle bullish impetus, the pair needs to take out this technical barrier decisively. The materialization of this move may invite new buyers into the market, creating the right conditions for an upward thrust towards 1.2720.

GBP/USD TECHNICAL CHART

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GBP/USD Chart Created Using TradingView

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Title: Unlocking the Secrets of the US Dollar: How CPI and the Fed’s Decision Will Impact EUR/USD, USD/JPY, and GBP/USD

Introduction:

The US dollar, also known as the greenback, is the world’s dominant reserve currency and is the most traded currency in the global foreign exchange (forex) market. The value of the dollar is influenced by various factors, including the economic performance of the United States, geopolitical events, and policies implemented by the US Federal Reserve (Fed). In this article, we will explore the relationship between the US dollar and three other major currencies – the euro, Japanese yen, and British pound, and how the Consumer Price Index (CPI) and Fed decision-making can impact these currency pairs.

What is the CPI and why is it important?

The CPI is a key economic indicator that measures the changes in the prices of a basket of goods and services commonly purchased by consumers in a country. It is used to measure inflation and is considered an essential tool for policymakers, businesses, and investors to gauge the state of the economy. In the US, the Bureau of Labor Statistics releases the CPI data every month, which is closely monitored by traders and analysts to gauge the potential impact on the US dollar.

How does the CPI affect the US dollar?

The CPI is closely linked to the purchasing power of the US dollar. If the CPI rises, it means that prices of goods and services are increasing, and the dollar’s purchasing power decreases as more of the currency is needed to purchase the same amount of goods. This can lead to inflation, which is generally considered harmful to the economy. As a result, the dollar’s value may decrease as investors lose confidence in the currency.

On the other hand, if the CPI falls, it indicates that prices are decreasing, and the dollar’s purchasing power increases. This can lead to deflation, which is also not favorable for the economy. In such a scenario, the dollar’s value may increase as investors see it as a more stable and reliable currency.

Impact of CPI on EUR/USD:

The EUR/USD is the most actively traded currency pair in the forex market and is heavily influenced by the CPI data. The euro and dollar are the world’s two largest reserve currencies, and any significant changes in their values can have a significant impact on global markets.

If the US CPI data shows a rise in inflation, it could lead to a decrease in EUR/USD as investors may sell euros in favor of the dollar, which is seen as a safer currency. On the other hand, a decrease in US CPI could lead to a rise in EUR/USD as investors may see the euro as a more stable currency.

Impact of CPI on USD/JPY:

The USD/JPY is the second most actively traded currency pair in the forex market. The Japanese yen is considered a safe-haven currency, especially during times of market volatility. The CPI data can impact the value of the USD/JPY pair in the following ways:

– A rise in US CPI could lead to an increase in USD/JPY as investors may see the dollar as a more attractive currency compared to the yen.

– A decrease in US CPI could lead to a decrease in USD/JPY as investors may buy yen as a safe-haven asset, leading to a decrease in the pair’s value.

Impact of CPI on GBP/USD:

The GBP/USD pair, also known as the “cable,” is heavily influenced by the CPI data, as both currencies have a strong economic and political relationship. The GBP/USD pair can be impacted by CPI data in the following ways:

– A rise in US CPI could lead to a decrease in GBP/USD as investors may sell pounds in favor of the dollar.

– A decrease in US CPI could lead to an increase in GBP/USD as investors may see the pound as a more attractive currency compared to the dollar.

The Role of the Fed in the Dollar’s Value:

In addition to the CPI data, the Fed’s monetary policy decisions also play a significant role in the value of the dollar. The Fed is responsible for setting interest rates, which can impact the dollar’s value in the following ways:

– A decrease in interest rates can make the dollar less attractive to international investors, leading to a decrease in its value.

– An increase in interest rates can make the dollar more attractive, leading to an increase in its value.

The Fed’s monetary policy decisions are closely watched by forex traders as they can have a significant impact on the dollar’s value and, in turn, affect other major currency pairs’ performance.

Conclusion:

In conclusion, the US dollar’s value is influenced by various factors, including the CPI data and the Fed’s monetary policy decisions. The CPI data provides a critical insight into the state of the US economy, which can impact the dollar’s value against other major currencies such as the euro, Japanese yen, and British pound. Traders, investors, and policymakers should closely monitor these indicators to make informed decisions in the forex market. Additionally, keeping an eye on the Fed’s policy decisions can also provide valuable insights into the dollar’s value and its impact on currency pairs.

By understanding the relationship between CPI and the Fed’s decision with the dollar’s value, traders can make more informed decisions and potentially profit from currency fluctuations. However, it is crucial to remember that forex trading involves risks, and market movements can be unpredictable. Therefore, it is essential to practice risk management techniques and conduct thorough research before making any trading decisions.

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