Inflation fell, but it's not time to be excited

12 August 2022 184
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In the middle of July the EURUSD pair reached parity levels, as it was expected. However, the price did not stay at these levels for long - the dollar began to weaken, and EURUSD rebounded by more than 3%. Is the trend of dollar strength really ending or we will see a renewal of multi-year maximums for the U.S. currency?

 

In addition to the technical oversold of Euro, the expectations of monetary policy easing by the Fed also started to play in support of the dollar's decrease. There were clear signs of an incoming recession (GDP has been decreasing for 2 quarters in a row), which were accompanied by inflation data this week. Price growth sharply slowed from 9.1% to 8.5% with expectations of a smaller decrease to 8.7%. Market participants immediately began to interpret this statistic as a reason to raise the key rate less sharply (by 0.5% instead of 0.75%) on the next Fed meeting on September 21.

 

However, a single slowdown in inflation is not a certain sign of a reversal of the entire trend to the strongest price growth for more than 40 years. Moreover, the slowdown in price growth in July was mostly due to a decrease in oil quotations and, as a consequence, gasoline quotations in the USA. Meanwhile, the other components of the consumer price index (especially food, services and housing rent) are not in a hurry to slow down at all. The labor market is still strong, and Fed officials have not enough reasons to change their "hawkish" position yet.

 

With regard to the euro, its fundamental weakness has not disappeared, and with new problems in the European economy (and with the coming cold season the energy crisis will not once remind us about itself) EURUSD can quickly renew its decrease.

 

The rebound from the 20-year minimums brought the EURUSD pair to the declining trend line. It is possible to open a position at current prices or wait for the price to reach the important range of 1.035-1.036 and sell from there.

 

 

The following trading strategy options can be offered:

 

1) Sell EURUSD at the current price. Take profit – 1,026. Stop loss – 1,035.

 

2) Sell EURUSD as it rises to 1.035. Take profit 1 – 1,03. Take profit 2 – 1,026. Stop loss – 1,04.

 

Also, traders may use Trailing stop instead of a fixed Stop loss at their convenience.

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