The U.S. dollar was virtually unchanged last Friday after Federal Reserve Chair Jerome Powell sounded a note of heightened concern over high inflation, while making clear that the Fed will begin tapering bond purchases shortly. While Powell said during Friday’s virtual panel discussion “the risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation,” he played down interest rate hikes. “I do think it’s time to taper and I don’t think it’s time to raise rates.” However, there is concern that faster tapering or more rate hikes will create the risk of a slowdown.
The Fed is expected to announce its taper at their policy meeting next week on Nov 3.
This week we will have the European Central Bank decision on Thursday, as well as the U.S. GDP (Thursday) and core PCE data (Friday). From a fundamental perspective, the U.S. dollar might be vulnerable to a larger correction going into the end of the month as Thursday’s U.S. GDP report is anticipated to show a slowing recovery.
As for the ECB meeting, no policy shifts are expected this month. The ECB is preparing for a major policy overhaul at the final ECB meeting in December. Policy makers are expected to start phasing out the emergency plan in December while it could be followed by a new program. This Thursday, the focus will be on the press conference and any hints from ECB President Christine Lagarde on faster interest rate increases amid a global surge in inflation. Current expectations see no ECB rate hike through at least 2023.
To sum up, Thursday’s decision could end with no movement in the EUR/USD.
EUR/USD: In short-term time frames, we will pay attention to a break above 1.1670 which could see a test of 1.17/1.1710. Bears on the other side, will wait for a significant break below 1.16 in order to shift the focus toward 1.15.
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