If today’s report on inflation in the US shows that it has finally slowed down for the first time since August 2021, this will indicate the recovery of the US economy. In the current situation, this news will encourage market participants who will rush to buy the US dollar as the currency of a country with a more stable economy.
The US dollar has been steadily gaining ground since late spring-early summer last year when it became clear that the US Federal Reserve would start monetary tightening. This is what is happening now as the Fed has initiated the biggest rate hike in almost a decade. This process is closely connected with inflation which is the main reason why the regulator had to resort to such measures.
Ahead of the recent meeting of the Federal Open Market Committee, investors expected the regulator to raise the rate by 0.75%. In case of the inflation rate decreases, the central bank may well slow down the pace of monetary tightening by raising the rate not at every meeting and by just 0.25% instead of 0.50%.
Naturally, the funds rate will eventually increase by the end of the year, but it won’t be as high as was previously expected. A few months ago, the Fed published its inflation target for the year-end, projecting it to be between 2.00% and 3.00%.
Given the current inflation rate, many analysts assume that it will meet the upper target of this range. In case of a slowdown, the lower target of 2% will become relevant. This will be a bearish factor for the US dollar since markets have already priced in the scenario of higher interest rates.
Therefore, the greenback may appreciate right after the publication of the inflation data, but after a while, it may start to fall, which may turn out to be a prolonged downtrend.
EUR/USD has been trapped in the sideways channel between 1.0500 and 1.0600 for the second week in a row, breaking through its boundaries from time to time. A prolonged flat movement signals uncertainty in the market which may later result in new speculative sharp movements.
The Relative Strength Index moves along the line of 50 on H4, thus confirming that the market is trading flat. The moving averages of the Alligator Indicator on H4 have multiple intersection points, which is another indication of a flat. The Alligator Indicator on D1 confirms a downtrend in the medium term as the MAs are pointing downwards.
Outlook
The pair is likely to leave the sideways channel between 1.0500/1.0600, which is a good opportunity for traders. The best trading strategy, in this case, would be to wait for a breakout of either of the channel boundaries.
Trading signals
- It is recommended to buy the pair only after the price holds above the level of 1.0636 on the 4-hour chart.
- Short positions can be opened as soon as the quote settles below 1.0470 on H4, as there were multiple breakouts of the 1.0500 level.
Comprehensive indicator analysis generates a mixed signal on short-term and intraday time frames due to the ongoing flat movement. In the medium term, indicators suggest selling the pair due to the downtrend.
