The story of the week, and perhaps of Q4 2022, is inflation cooling off in the United States. Higher inflation drove the US dollar higher for most of the year, and each report disappointed.
Until yesterday.
US inflation data for October showed the CPI m/m rising 0.4%, below the 0.6% estimate. Moreover, the Core CPI m/m, which excludes energy and food prices, climbed 0.3% on 0.5% expected.
As such, the yearly CPI fell from 8.2% in September to 7.7% in October – an encouraging sign that the Fed hikes work their way through the economy.
It is, therefore, no wonder that the market reacted as it did. Stocks surged, and the dollar tanked in response.
In particular, one currency pair deserves special attention – EUR/USD.
Has the EUR/USD bottomed?
It looks like it did. I already published an Elliott Waves analysis in October about it; you can read more here.
The latest drop to 0.98 marked the retest of the upper edge of the falling channel that contained the price in 2022. It bounced just in time and regained parity even before yesterday’s inflation report.
The dollar took a hard hit when the news came out that inflation might have peaked. EUR/USD surged from 0.9950 to above 1.0150 and even traded above 1.02 overnight.
What is the first line of resistance?
There is no resistance in sight until the 1.0350-1.04 area. This level represents the previous lower high, and traders with short positions usually place their stops at such a level.
Where will the rally stop?
Before answering this question, one should remember that many bearish bets on the euro still exist. After all, the war in Ukraine and the high inflation in the euro area are enough to scare investors.
But the EUR/USD is a currency pair. As such, the price action is driven by events from both the US and the euro area.
And this move is a dollar move – not a euro move.
As such, above 1.04, the next level of resistance is 1.06. Only 1.10 should contain this rally and one should not be surprised to see the EUR/USD flirting with it by the end of the year.