Inflation in the United States is rising at a notably faster pace than was expected. Even in the worst-case scenario, consumer prices were projected to rise to 8.4% from 7.9%. According to the major forecast, the indicator should have reached 8.3%. But it turned out that inflation has accelerated to 8.5%. It is having a huge negative effect on the US economy.
In theory, this factor should weigh on the US dollar, but the greenback continues to strengthen nevertheless. It seems that investors realized that the Fed’s rate hike lies in a certain range which has its lower and upper limits.
Since inflation continues to accelerate, market participants assumed that the Fed would raise the rate to the upper limit of the range. This means that at every second meeting of the Federal Open Market Committee, the rate will be increased not by 0.25% but by 0.50%. In other words, the pace of monetary tightening will be one and a half times higher than the Fed promised. So, markets will have to adjust to this rally.
As inflation keeps running high, the producer price index is expected to go up from 10.0% to 11.0%, as this is a leading indicator. Therefore, the US dollar will rise further.
After a short pullback, EUR/USD resumed its decline and approached a pivot point of 1.0800. A gradual decline in euro signals an upcoming breakout of the support level. This is where the medium-term downtrend will be extended.
The RSI is holding in the lower area at 30/50 on H4, indicating high interest in short positions. There is currently no signal showing that the euro is oversold. The Alligator Indicator on H4 and D1 confirms the downward cycle as the MAs point down.
Outlook
Consolidation below the level of 1.0800 on the 4-hour chart will indicate a continuation of the trend. In this case, the price may head towards the local low of 2020. Alternatively, the pair may slow down its pace of decline near 1.0800. This may result in a short pullback but not in a reversal.
Comprehensive indicator analysis confirms a sell signal in the short-term, intraday, and medium-term periods due to a rapid downward movement.
