Thread: Daily Market Analysis from ForexMart

USD/JPY: that's it, no movie!

Federal Reserve Chairman Jerome Powell's dovish speech pulled down the dollar. Yesterday, the U.S. currency experienced a resounding sell-off on all fronts, but saw the biggest loss against the yen.

A crushing blow from Powell
At the middle of the week, Powell spoke about the economic outlook, inflation and US employment at the Brookings Institution.

It was Powell's first public speech since the November FOMC meeting, so traders were looking forward to his comments on the central bank's future course.

The market has been in a state of strong uncertainty. Softer inflation provoked speculations about a possible slowdown of tightening in the US, and recent hawkish comments made by Fed representatives have cast doubts on this.

Until yesterday, dollar bulls had illusions about further sharp rate hikes in the US. However, Powell just shattered their hopes: the central bank intends to slow down.

He said it makes sense to 'moderate' the pace at this stage to balance risks. He also hinted that the Fed might take less aggressive steps at its next meeting.

After Powell's dovish rhetoric, the likelihood of a 50 bps rate hike in December rose from 69.9% to more than 90%.

The sharp weakening of hawkish market expectations took a heavy toll on the dollar. It interrupted its 3-day climb and went into free-fall.

Yesterday, the DXY index posted its biggest daily loss of the week, falling more than 1% from its major peers.

Goodbye USD/JPY
The U.S. currency showed the worst dynamics on Wednesday against the yen. The USD/JPY plummeted 1.2%, testing the 3-month low at 136.50 in one moment.

A steep peak in yields on 10-year U.S. Treasuries contributed to the yen's sharp growth. The index fell to a one-month low of 3.6% after Powell's comments.

"The dollar is losing more altitude as the market embraces a less hawkish than feared message from the Chair," said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. The "big decline in 10-year Treasury yields sees the yen at the top of the leaderboard."

Recall that this year the Japanese currency suffered the most from the aggressive Fed rate, and the Bank of Japan's dovish policy adds more pressure on it.

The BOJ is the only major central bank that has never raised interest rates this year.

The hope that appeared last month that the Fed might soon slow down the pace of tightening helped the yen recover from its multi-year lows.

The JPY showed the best uptrend against the dollar in November. It strengthened by more than 7%. This is the biggest monthly gain for the JPY in 14 years.

Now, when Powell actually gave the signal to start a slowdown in interest rates in the U.S., many analysts have revised their forecasts for the pair - downward.

According to experts, the asset has already exhausted its bullish potential and is unlikely to return to spectacular and confident growth in the near future.

In the short term, the major will move mainly downwards, still weighed down by Powell's dovish statement.

Also, US economic data may become a headwind for the dollar-yen pair. If the market sees another symptom of the approaching recession, it will finally convince traders that the US central bank will hit the brakes this month.

Analysts predict this is likely to happen. The ISM manufacturing activity index for November will be released today. Economists are predicting that the index will fall from 50.2 to 49.8.

Another headwind for the dollar will be the return of risk sentiment to the market due to the easing of anti-Covid measures in China. This should also favor USD/JPY bears.

EUR/USD. All eyes on Nonfarm

Traders are focused on today's NonFarm Payrolls report. Key US labor market growth data is especially important right now in light of recent events. If the data lets the dollar bulls down as well (in addition to the PCE and ISM manufacturing index), the greenback will bear significant pressure in all major pairs. Also, keep in mind that the NonFarm Payrolls will be released less than two weeks before the Federal Reserve's December meeting. The last speech of Fed Chairman Jerome Powell was not beneficial for the dollar (in my opinion - undeservedly), while a disappointing labor market report will only add fuel to the fire. In that case, the EUR/USD bulls, in particular, can already think about conquering the 6 figure in the medium term.

In general, recent events are not unfolding in favor of the U.S. currency. And it is not only because of objective circumstances. For example, the market reacted quite adequately to the decline of the ISM manufacturing index, which collapsed to 49 points, reaching its lowest value since May 2020. Traders also reacted fairly to the slowdown in the core PCE index, although this slowdown was minimal (and predictable).

No complaints here, as they say. At the same time, in my opinion, market participants are interpreting too many fundamental factors against the greenback - even in those cases where there is a less favorable aspect of the issue. For example, Powell said during his last speech that the time to reduce the pace of rate hikes "may come as soon as the December meeting." At the same time, he said that the final level of the federal funds rate will likely be higher than the September forecasts. It is noteworthy that Powell had previously voiced both theses, and each time the market reacted differently to his words.

Lately, the fundamental environment has not been in favor of the greenback: traders are keenly reacting to negative information for the dollar and are quite skeptical to positive (hawkish) signals. A vivid example of this is the market's reaction to Powell's speech: market participants went with the dovish messages and chose to ignore the statement that the final rate will be at a higher level.

All this suggests that today's Nonfarm data will also be treated in a "special" manner. In my opinion, the data can only support the dollar if all components of the report come out in the green. Otherwise it will be interpreted against the greenback.

Let me remind you that dollar bulls were not impressed by the last (October) Nonfarm data. Specifically, the unemployment rate climbed to 3.7% (from the previous value of 3.5%) and the average hourly wage growth rate slowed on an annualized basis to 4.7%, whereas it has been consistently above or in line with the 5% level since January. The share of the economically active population in October slightly decreased, but still, to 62.2%. All of the aforementioned indicators came out in the red, much to the disappointment of supporters of the strong dollar. After this report, the odds of a 75-point rate hike at the December meeting dropped to 20% (according to the CME FedWatch Tool). Accordingly, the 50-point scenario became the base case, with an 80% chance of being realized.

According to general forecasts, the number of employed people should increase by 200,000 in November. The unemployment rate is likely to remain unchanged at 3.7%. The annualized growth rate of average hourly earnings may slow to 4.5%.

In my opinion, the dollar will get no support even if all components of the release come out at projected levels. At the same time, there is definitely an implication that the numbers may not reach the forecasts at all. The alarm bells have already rung on this subject: The day before yesterday, the ADP released a disappointing report which showed an increase of 127,000 new jobs in the non-farm payrolls, contrary to its forecast of 200,000.

However, we have to admit that the ADP numbers do not always correlate with the official numbers, so there is still intrigue here.

At the moment, it is advisable to take a wait-and-see attitude towards all dollar pairs, and EUR/USD is not an exception here. The Nonfarm data will probably not be able to change the situation: as mentioned before, the fundamental situation is not in favor of the dollar. Nevertheless, opening long positions ahead of such an important release is a very risky action. Taking into account the "Friday factor", it is an unreasonable risk, especially since the pair is in the area of 5-month highs.

EUR/USD regains upside position, dollar left with one trump card

Markets prefer to shoot first and then think later. Otherwise, they would miss the moment. When ECB President Christine Lagarde said that central banks should pursue policies that would anchor inflation expectations, investors began to buy the euro with renewed vigor, pushing EURUSD quotes to the highest levels since June. In reality, however, Lagarde's phrase does not guarantee that the deposit rate will rise by 75 bps in December. No matter how this shot turned out to be a blank.

The logic of investors selling the U.S. dollar is clear: inflation is slowing and will continue to do so, which means the Fed does not need to take giant steps down the road of tightening monetary policy. The factor of an aggressive federal funds rate hike, along with U.S. exceptionalism and high demand for safe haven assets, was the key driver of the EURUSD rally. If the ECB starts to catch up with the Fed, the dollar has one less trump card to play.

Lately, the macrostatistics of the euro area has been pleasantly surprising, which is reflected in the growth of the index of economic surprises. It is quite possible that the currency bloc will either manage to avoid recession or the recession will be quick and insignificant. It looks like the U.S. is not as far from the eurozone as previously thought. A change in investors' outlook on the matter has given EURUSD a helping hand.

Dynamics of Economic Surprise Indices

In fact, the U.S. dollar has only one trump card left—its status as a safe-haven asset, and even that fails. When the yield of Treasury bonds grew, the competitors of the grenback in the face of gold, yen and franc were in disgrace. However, the decline in interest rates on debt has turned them from outsiders into favorites. As a global recession approaches, investors will no longer park their money in North America, but will prefer Japan, Switzerland, or a perpetual asset.

Jerome Powell had a chance to turn things around. Had he voiced his dissatisfaction with financial conditions, the EURUSD pair would hardly have been able to soar above 1.05. The weakening of the latter makes it difficult for the Fed to fight inflation, but the central bank also seems to believe that the PCE will continue to slow.

Dynamics of financial conditions in the USA

Unlike Lagarde, who believes that the global economy is entering an era of volatile inflation. That is why central banks should anchor inflation expectations at the target level of 2%. Households must trust that their work will lead to price stability. That's the only way to win.

Volatile inflation makes it doubtful that EURUSD will continue to go further upward in the same way as in October and early December. Most likely, it will be stormy.

In technical terms, the euro approached the target by 161.8% by the Crab pattern within an arm's length. It is located near the $1.061 mark. A rebound may follow from it or from the 1.057 pivot point, which will allow to partially take profits on the longs formed above 1.0395. Subsequently, we use pullbacks to buy EURUSD.

USD unlikely to start long-term rally​​​​​​​

The US dollar managed to settle at the current highs thanks to upbeat US macro stats. The euro. on the contrary, dived down. Nevertheless, analysts believe that the greenback will hardly will be able to start a long-term rally even though it has risen significantly in the short term.

On December 5, the greenback grew markedly against the euro amid positive reports on the US PMI Indices. In November, the ISM Services Index increased to 56.5% from October 54.4%. The reading surpassed forecasts as economists had anticipated a decline to 53.3%.

Unexpectedly strong macroeconomic reports helped the greenback regain momentum. On December 6, the uptrend continued but it was not as strong as the day before. The dynamic of the US currency is relatively calm as the economic calendar is empty. At the same time, the EUR/USD pair was trading at 1.0487, trying to consolidate at the recent highs.

In October, factory and durable goods orders also exceeded forecasts. Market participants were surprised by a sharp increase in the ISM Services Index. According to economists, it signals a rise in inflationary pressure in the service sector although some signs of disinflation have already been seen in the commodity sector.

Analysts at the St. Louis Fed point out that current inflation expectations in the United States somewhat reflect the effectiveness of the Fed's hawkish stance. They are mainly fueled by geopolitical woes and strong US macro stats. They also note that there may be a lull on Forex. Only on December 6, the US trade balance report is due. According to preliminary estimates, the trade deficit is expected to grow to $80 billion from the previous $73.3 billion.

Next week, several central banks will hold their monetary policy meetings. Investors are curious to find out the size of the rate increase. The Fed is expected to hike the interest rate by 50 basis points, up to 4.25%-4.5% at the December meeting. There is also a chance that the Fed could take a pause in monetary tightening. Fed Chairman Jerome Powell admitted that "slowing down at this point is a good way to balance the risks." Yet, he added that the watchdog would keep raising rates as "restoring price stability will likely require maintaining a restrictive policy stance for some time."

Against this background, a slight decline in the US currency is possible. Last month, the greenback noticeably weakened. However, it will hardly start a downtrend in the near term. A downward reversal could take place after a period of high volatility, analysts at MFK Bank pinpointed. They reckon that the US dollar could remain volatile in the next three to four months. By the end of 2023, it may drop significantly. At the same time, they see no reason for a prolonged decline of the greenback although it is unable to start a steady correction due to current economic conditions.

The US currency may lose ground if the Fed takes a less hawkish stance. However, if the Fed remains strongly committed to aggressive tightening, it will boost a long-term rally of the US currency. Hence, It will recover next year.

Will the dollar still be at war? USD/JPY forecast for 2023

The USD/JPY pair plummeted in November, which made many question its bullish potential. However, the dollar's recent growth convinces investors otherwise. So what to expect from the major?

The dollar is winning so far
The greenback rose 0.3% against its major peers on Wednesday night. The dollar was supported by rising concerns about the global recession.

The day before, three leading U.S. banks - J.P. Morgan, Goldman Sachs and The Bank of America - said they expect a slowdown in global economic growth next year, as rising inflation is threatening consumer demand.

The pessimistic outlook reinforced the anti-risk sentiment that prevailed for the third consecutive session. The MSCI All-Country World Index, which tracks stock market performance in 48 countries, fell 1.26%, down from a three-month high last week.

The loss of appetite for equities and increased demand for the dollar was also triggered by strong US macrodata. Recall that earlier this week the Institute for Supply Management (ISM) said that economic activity in the services sector grew from 54.4 to 56.5 in November.

The data followed Friday's report from the U.S. labor market, which also pleased dollar bulls. The nation's NonFarm Payroll employment rose more than forecast last month.

The portion of optimistic data greatly strengthened the market's hawkish expectations for further monetary policy by the Federal Reserve.

Currently, most traders expect the U.S. central bank to raise the rate by 50 bps next week. The probability of an increase by 75 bps is only 5%.

However, talk of a higher peak in U.S. interest rates has returned to the market. Many investors believe the rate could reach 5.25% in 2023, whereas now it is in the 3.75-4% range.

The hope that the Fed will continue to raise rates next year and keep them high for a long time acts as a very powerful trigger for the dollar at this point. This factor particularly helps the greenback against the yen.

After USD/JPY plummeted to a 3-month low of 133.64 last week, it has now gained 3% and has managed to stay above 137.

There aren't many new factors that can strongly influence the asset's dynamics now. In the coming days, investors will focus on two events: the US consumer price index for November and next week's Fed meeting.

If investors see more robust inflation and hear hints of a higher peak in U.S. interest rates from U.S. officials, it will likely trigger a new wave of growth in the USD/JPY pair.

What's in store for the USD/JPY next year?
In November, the U.S. currency posted its worst monthly performance in 14 years against the yen. It fell by more than 7% due to fears that the US central bank is going to slow the pace of rate hikes.

However, most currency strategists, recently surveyed by Reuters, believe that in the next few months, USD/JPY will be able to hold its annual growth, which amounted to 20%.

The growing threat of recession in the U.S. and other countries should provide support to the dollar. In the backdrop of risk aversion, the greenback will once again feel a surge of strength, which will help it recover its recent losses on all fronts, even against the yen.

"For now, the forces that have supported the USD this year remain valid, despite the recent correction lower. Other currencies do not look as attractive yet," said Athanasios Vamvakidis, head of G10 FX strategy at Bank of America.

In the BofA baseline, the U.S. dollar will remain strong early next year and will only start a more sustained downward path after the Fed pauses.

Despite the dollar's recent pullback, major currencies are not expected to recoup their 2022 losses against the USD until at least late 2023, the survey showed.

Analysts estimate that the Japanese yen, down nearly 20% for the year and currently trading around 136.50 per dollar, was expected to change hands around 139.17, 136.17 and 132.67 per dollar over the next three, six and 12 months respectively.

EUR/USD. The Fed to set the stage for longer drop in USD in 2023

The euro seems to leave its lows behind. What does the EU currency await next year?

In 2022, the energy crisis affected the EUR/USD pair significantly. It triggered the strongest collapse of the European currency. According to analysts, the peak of fears about the energy crisis in the eurozone has passed. There are reasons for optimism now.

"Outside of an unseasonably harsh winter, the energy situation in Europe looks manageable given the securing of alternative energy supplies and double-digit energy demand erosion. The drawdown of critical stocks is already progressing better than feared," NatWest reported.

The key factor for the euro/dollar pair exchange rate should continue to be seen primarily through the lens of the balance of payments and terms of trade shift driven by energy prices.

The trade deficit has worsened this year. The cost of energy imports skyrocketed after Russia cut gas exports to the region. As a result, the region's current account became deficit for the first time in years.

NatWest economists expect the euro area's new trade deficit to be counterbalanced by positive net capital flows.

"There is potential for earnings and holdings to be repatriated if the USD strengthens further," the experts noted.

However, winter has just started and it is too early to make any conclusions. If temperatures in Europe fall below critical levels, investors may focus on the supply problem again.

In December, a sharp cold snap is expected in the region, which could lead to a noticeable increase in consumption.

"The winter may turn out to be colder than average, but it's impossible to have that as a base case. Yet valuations appear to include an unrealistically high probability of such a risk case," NatWest added.

It is unlikely that cyclical lows in the EUR/USD pair will be revised next year. Its decline should also be limited to a rebalancing of central bank reserves. The rebalancing should occur to the detriment of the greenback and to the benefit of currencies such as the euro.

This could mean that market players will have to sell USD to buy other currencies in their reserves every time the US currency rallies.

The downtrend for the dollar is inevitable, it is a question of timing. In the coming months, its exchange rate is expected to fall as the peak of the Fed's rate hikes is reached.

NatWest's forecasts for the euro/dollar pair are relatively contained. At the end of the first quarter, the quote should remain below 1.0500, and it should grow up to 1.0600 by the end of the second quarter. At the end of the third quarter, it is projected to rise to 1.0700 and 1.0800 by year-end.

Short-term outlook

On Thursday, the EUR/USD pair attempted to stabilize above 1.0500. The technical picture suggests that buyers maintain control over the market in the short term.

On Thursday, markets expect the weekly US labor market data. Traders are likely to ignore this report. This means that the EUR/USD pair's direction will be driven by the market sentiment with regard to risk.

The growth of the major US indices will hinder the upward trend of the US dollar, which will help the EUR/USD pair to rise. A negative shift in sentiment will have the opposite effect on the quote.

The list of events for the euro includes a speech by ECB head Christine Lagarde at a virtual conference. However, we should not expect any important statements on the prospects of rates, as the ECB is in silent mode ahead of next week's monetary policy meeting.

Thus, risk appetite will have a huge importance for the short-term outlook.

The intermediate resistance level is at 1.0540, further - 1.0580, and 1.0600. The bearish scenario should be considered after the price breaks through 1.0500. Following this scenario, the euro may fall to the area of 1.0460 and 1.0430.

Bulls need to protect the level of 1.0450 to prevent the bearish scenario.

Since no fundamentally important events are expected in the short term, investors are again focused on recession risks. This now helps keep the greenback from falling.

On Thursday, the US dollar index fixed above 105.00, continuing to rise this week and benefiting from risk aversion in the market. Support was also provided by speculation that the Fed will continue to raise rates and hold them higher longer after the release of unexpectedly strong US employment, services, and manufacturing data.

Now traders are waiting for data on CPI in the US to be released next week, as well as the Fed meeting, where a more moderate rate hike of 50 bps is expected.

In general, the US dollar looks oversold, it has experienced its strongest monthly drop since 2009. A correction is possible in the coming weeks. However, it will resume its decline next year. Prerequisites for a longer fall in the exchange rate may be created by the Fed.

Weekly forecast for EUR/USD, USD/JPY, GBP/JPY, USD/CAD, NZD/USD, and GOLD from December 12 (simplified wave analysis)

EUR/USD

Analysis:

The September 26 incomplete wave algorithm determines the short-term trend of the major European currencies. The movement's overall level has now surpassed the D1 scale. After its breakout, the intermediate resistance became support. The quotes have been forming an imperfect interim correction over the past week.

Forecast:

The general sideways trend of euro price fluctuations is anticipated to continue in the early days of this week. Its second half is more likely to see an increase in volatility, a reversal, and a continuation of the price rise.

Potential zones for reversals

Resistance:

- 1.0760/1.0810

Support:

- 1.0450/1.0400

Recommendations:

Sales: are potentially unprofitable and have limited potential.

Purchases: Your vehicles may be suggested for trading transactions once the corresponding signals for those vehicles appear in the support zone.

USD/JPY

Analysis:

The imperfect algorithm of the descending stretched plane of the major pair of the Japanese yen determines the primary direction of intraday trends. The wave has reached its peak. The price breached a strong support level that had previously served as resistance.

Forecast:

The price of the pair anticipate mainly moving "sideways" along the predicted resistance over the coming few days. You can anticipate a reversal and a continuation of the bearish course closer to the weekend. The calculated support represents the lower bound of the expected weekly entry of the pair.

Potential zones for reversals

Resistance:

- 137.50/138.00

Support:

- 133.60/133.10

Recommendations:

Purchases may be made during different sessions. It is advised to purchase a fractional lot due to the low potential.

Sales: this will only be important once your vehicle's corresponding reversing signals appear in the resistance zone area.

GBP/JPY

Analysis:

Since the end of September, the waves on the pair's chart between the British pound and the Japanese yen have been descending. The wave structure is still undergoing correction as a horizontal plane forms. There aren't any completion signals at the time of analysis.

Forecast:

The general lateral mood of the pair's fluctuations is anticipated to persist this week. When there is likely pressure on the resistance zone, you can watch for a change in course. Most likely, the decline stops at the calculated support.

Potential zones for reversals

Resistance:

- 168.60/169.10

Support:

- 164.00/163.50

Recommendations:

Small-lot purchases are possible during a single day. Lowering the trading lot is safer.

Sales: are available following the occurrence of verified reversal signals in the vicinity of the resistance zone.

USD/CAD

Analysis:

The Canadian dollar chart's most recent wave structure, which is useful for forecasting and trading, is directed downward and has been decrementing since September 26. In its structure, the middle part (B) is formed. After it is finished, part (C) will come next, bringing the wave's overall wave scale to the level of the reversal.

Forecast:

The upward movement is anticipated to continue at the start of this week, up to the limits of the calculated resistance. When a reversal forms and the downward course resumes, you can wait for it to happen.

Potential zones for reversals

Resistance:

- 1.3740/1.3790

Support:

- 1.3190/1.3140

Recommendations:

Purchases: are highly risky and could end up being unprofitable.

After the emergence of reversal signals in the vicinity of the resistance zone, sales may be advised.

NZD/USD

Short analysis

Since the end of September, an upward trend has been forming on the chart of the major New Zealand dollar pair. The price has reached a strong potential reversal zone over a broad timeframe. The wave structure's analysis suggests that quotations could increase to their maximum level.

Forecast for the coming week:

The likelihood of a sideways flat at the start of the upcoming week is very high. The price could move downward, but only as far as the support boundaries allow. The second half of the week should see the most activity and the start of price growth again.

Potential zones for reversals

Resistance:

- 0.6500/0.6550

Support:

- 0.6350/0.6300

Recommendations

Sales in the vicinity of the resistance zone should only be made once confirmed reversal signals have appeared.

Purchases: advised by a cut-down quantity from the support zone. The resistance zone restricts the potential.

GOLD

Analysis:

A downward wave has been driving the trend in the gold market since March of this year. Gold prices have been correcting over the previous two months, forming the middle of the wave. The price is close to a significant resistance area at the time of analysis. The ascending section's structure needs to be completed.

Forecast:

The upward movement vector is anticipated to carry on this coming week until the resistance zone rise is fully completed. A brief decline in the support area is not ruled out over the next few days.

Potential zones for reversals

Resistance:

- 1830.0/1845.0

Support:

- 1785.0/1770.0

Recommendations:

There won't be any restrictions on sales in the upcoming days.

Purchases: Within the parameters of individual trading sessions, fractional lots may be purchased from the support zone.

Reasons: Each wave has three components in a simplified wave analysis (UVA). The final, incomplete wave is examined at each TF. The dotted line depicts the predicted movements.

Be aware that the wave algorithm needs to account for the instruments' temporal movement length!

USD/JPY badly hurt by inflation, waiting for a counter shot from the Fed chair

Yesterday was a black Tuesday for the dollar. A cooler than expected US inflation report sent the greenback into free-fall in all directions. The biggest losses were sustained by USD/JPY.

Just like last month, U.S. inflation gave traders a shocking surprise. The consumer price index increased by only 7.1% from a year ago. That was less than economists' preliminary estimate of 7.3% and the previous value of 7.7%.

The so-called core CPI, excluding volatile food and energy prices, also turned out to be softer. It rose 6% on an annual basis against a forecast of 6.1% and an increase of 6.3% in October.

The significant reduction in inflationary pressures eased the market's hawkish expectations about the Federal Reserve's future monetary policy.

Following this data, the dollar collapsed on all fronts. Yesterday, the DXY index plummeted about 0.9% to 104.02.

The USD/JPY pair showed the worst dynamics, as the yen jumped, boosted by a rally in Treasuries. US bond yields sank with the US 10-year falling from 3.60% to 3.43%.

In this backdrop, the major collapsed by more than 250 points, or 1.5%. Tuesday's low was the lowest of the week at 134.67.

Such a sharp decline in USD/JPY significantly damaged the outlook for the dollar. The price is back under the area of the 200-day Simple Moving Average, which indicates a clear technical advantage of the bears.

A break under 134.60 would expose the next support around 134.10. Below attention would turn to the monthly low at133.60.

According to analysts at Rabobank, by the end of the week, the USD/JPY risks falling even lower, if the bears stay the course. The downtrend may get support from today's Fed monetary policy meeting.

If the Fed's stance turns out to be more dovish, there is a high probability that the USD/JPY pair will test the level of 130.00 even before the weekend. It has not been uncommon for the yen to fly 500 pips in a week, experts said.

Eyes now turn to the Fed meeting with investors particularly interested in the press-conference of Fed Chairman Jerome Powell.

Investors have already fully taken into account the possible slowdown in rate hikes in the U.S. Now most market participants expect that the rate will be raised not by 75 bps, but only by half a percentage point.

If the forecast comes true, it probably won't put much pressure on the dollar. What could really bring down the U.S. currency is the Fed's hint at lower interest rates.

In light of the latest U.S. inflation data, traders have revised their forecast for peak interest rates downward.

At this point, the rate is expected to rise to 4.8% next year, after which the U.S. central bank will wind down its anti-inflation campaign.

The lower end rates also suggest a less drastic tightening. Many traders are now inclined to expect the Fed to raise interest rates by 25 bps in February and March.

Such a scenario is extremely unfavorable for USD/JPY, which rose to 30-year highs this year due to a strong interest rate differential between the Fed and the Bank of Japan.

Now that there is hope for a less aggressive rate of the U.S. central bank, the yen might regain its lost ground.

However, let's not bury the dollar just yet. Its fate is now completely in the hands of Powell. Many analysts believe that Powell will try to convince investors that the current slowdown does not mean a dovish pivot.

Most likely, the Fed chief's main argument for further tightening will be the fact that inflation is still very high. It is now running three times higher than the central bank's target level.

Earlier, Powell repeatedly stressed that officials won't prematurely end their assault against inflation until the consumer price index returns to 2%.

If he succeeds in strengthening the hawkish expectations of the market, the dollar may gain support and consolidate in tandem with the yen in the short term.

EUR likely to recover

This week, the euro has been extremely volatile. After a sharp rise amid the weakening of the US dollar, it rolled back again. However, there is still a chance for recovery.

On Thursday morning, the European currency noticeably declined against the US dollar. Traders are now looking forward to the ECB meeting. The central bank will announce its rate decision as well as provide comments on the likelihood of a recession. Analysts believe that the euro could take advantage of the situation and resume an upward movement. Currently, the EUR/USD pair is trading near 1.0655, trying to reach new highs.

The euro has a high upside potential because the greenback is climbing solely thanks to the Fed's hawkish rhetoric. However, this bullish momentum may weaken at any moment. According to Credit Suisse, by the end of 2022, the EUR/USD pair is projected to test the May high of 1.0800.

As the New Year and Christmas holidays are approaching, many analysts have once again brought up the topic of the parity level. Opinions are polarized. Many FX strategists do not expect the pair to retreat to this level, while others believe that the odds are extremely high. Economists at Rabobank reckon that the EUR/USD pair is likely to reach parity in 2023.

Now, speculators are digesting the results of the Fed meeting. The central bank raised the interest rate by 50 basis points to 4.25%-4.5% on an annual basis. The fed funds rate is expected to peak at 4.75%-5.00% next year. Fed officials confirmed that they would stick to further tightening to tame inflation.

The so-called dot plots show that Fed policymakers have a median forecast of 5.1% for the fed funds rate at the end of 2023. The watchdog also said it would not plan to cut the key rate over the next year. The Fed also expects its rate to come down by the end of 2024 to 4.1% and to 3.1% by the end of 2025.

Apart from that, the Fed will continue to reduce its balance sheet. It announced this move in May of this year and started to trim its balance sheet in June. Currently, the Fed's assets stand at $8.6 trillion.

Now, the central bank's main priority is to cap inflation, pushing it to the 2% target. Inflation is still high although it is gradually decreasing. The Fed sees inflation risks 'weighted to the upside'. For this reason, it will stick to a hawkish stance until inflation declines to the target level.

Later, the ECB will announce its rate decision. According to preliminary forecasts, the ECB is projected to hike the key rate by 50 basis points, taking it to 2.5%. Earlier, the ECB raised the rate by 75 basis points. In addition, it will also unveil its macroeconomic projections.

Analysts at Credit Suisse contemplate that a 50 basis point rate hike could adversely affect the euro. However, it will hardly undermine the bullish trend. It might occur only if Christine Lagarde provides rather dovish comments on the future plans for monetary policy and the final range for the key rate. Such a scenario looks unlikely, Credit Suisse pointed out. However, persistently high inflation and rising wages increase the chance of a 75 basis point rate hike. If so, the euro will definitely rise.

EUR/USD. Analysis for December 27, 2022

The euro/dollar instrument's 4-hour chart still shows a convincing wave marking, and the entire upward section of the trend is still very complex. It now has a clear corrective and lengthened form. The waves a-b-c-d-e have been combined into a complex correction structure, with wave e having a form that is significantly more complex than the other waves. Since the peak of wave e is much higher than the peak of wave C, if the current wave layout is accurate, construction on this structure may be nearly finished or may already be finished. In this scenario, we must construct at least three waves. In any case, I'm getting ready to lower the instrument. The market has demonstrated to everyone this year that it would rather wait and rest than actively work, so it may start as early as next year. The market is prepared to sell when an attempt to surpass the 1.0726 level, which corresponds to 200.0% Fibonacci, fails. Despite what might seem to be everything needed for it, the demand for US currency is still not increasing. The wave e's internal wave structure is extremely ambiguous, making it challenging to identify sub-waves.

A depressing start to the new week.

On Monday, the euro/dollar instrument increased by 20 basis points. Please note that these statistics are highly conditional, so readers should not draw any conclusions from them. The opening and closing levels of the day rarely fall on the same level. Therefore, even if there is no movement at all, one of the currencies will still rise or fall at least slightly at the end of the day. In contrast, there are currently no movements, amplitudes, or market participants.

Due to the fact that many nations celebrated Christmas on Monday, the volume of trade and subsequent movements were negatively impacted. There were no changes from yesterday when it was possible to completely avoid opening the trading terminal. The wave marking hasn't changed in over a week. No news context is provided. I still anticipate a decline in quotes based on the current wave markup because I think the upward trend section is finished. The markets will be ready to increase demand for the euro currency if an attempt to break the 200.0% Fibonacci mark is successful. Many analysts discussed the potential movements of the instrument in January 2023 in the final days of the previous year, and the majority of them agreed that the US currency should start to strengthen. I concur with this viewpoint in light of the wave analysis. You must wait because there have been no movements at all thus far. Maybe just until the holidays are over, or maybe it will be much longer. I don't believe the market will start operating actively on January 1 right away. Nearer to the middle of next month, active work is most likely to be seen.

Conclusions in general
I draw the conclusion from the analysis that the upward trend section's construction has grown more intricate and is almost finished. As a result, I suggest making sales with targets close to the estimated 0.9994 level, or 323.6% Fibonacci. Although there is a chance that the upward portion of the trend will become even more extended and complicated, and the likelihood that this will happen is still high, at least we now have a signal for a decline from which we can start.

The wave marking of the descending trend segment noticeably becomes more intricate and lengthens at the higher wave scale. The a-b-c-d-e structure is most likely represented by the five upward waves we observed. After the construction of this section is complete, work on a downward trend section can start.