Inflation in the US was 7% in December, the highest since June 1982, according to data released yesterday. After their publication, the US dollar seems to have lost value.
The exchange rate of the main currency pair EUR/USD broke through the potential resistance level at 1.1380 USD on Wednesday with a lot of momentum and seems to be rising towards 1.1450 USD quite quickly. As a result, the euro against the dollar seems to be the most expensive in two months. This exchange rate was last seen in the first half of November 2021.
It may also mark a breakout from the consolidation that has been going on in this market since the beginning of December. The weakness of the US currency, in relation to other major currencies, may be most evident against the British Pound. The GBP/USD exchange rate seems to be growing continuously for four weeks, reaching the levels from the end of October 2021.
Possible larger correction of USD quotes?
It is also worth paying attention to the positioning on contracts for the US dollar index. According to the COT report published by the CFTC, the number of net long positions on the USD index contract increased last week to 39 thousand from 31 thousand in mid-December.
At the same time, the index price did not increase and seemed to oscillate at the level of 97 points. This may mean that despite the increase in net long positions, buyers were unable to lift the market, which may in turn lead to their disappointment. If so, closing long positions could see a larger correction in the dollar index futures.
Fed: US ready for higher rates
So it seems that the scenario, buy the rumors, sell the facts, may be coming to fruition in the dollar market. US inflation was confirmed at 7% and a little earlier Jerome Powell, head of the Federal Reserve, dispelled expectations of a more hawkish Fed approach to financial policy during testimony in Congress earlier this week, admitting that the US economy is ready for higher interest rates and quantitative tightening to fight inflation. He added that policymakers are still discussing the Fed's balance sheet reduction approach, which could take up to four meetings to reach such a decision.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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