Dollar rebounds on higher inflation expectation

Despite worse than expected consumer confidence,
dollar rebound strongly in US session on increasing inflation expectation. Conference Board Consumer Confidence fell to 99.6, a nine-month low in Aug, much worse than expectation of a drop from 106.5 to 103.5. Prior reading was revised up to 107.0. However,. expectations for the inflation rate 12 months from now rose to 5.5% from 5.1%, slightly below this year’s high of 5.6%. Focus now turns to FOMC Minutes.

Fed has paused it’s tightening cycle and kept rate unchanged at 5.25% for the first time in more than two years The vote was not unanimous, with Richmond Fed President Lacker voting for a 25bps hike. The Fed has made it clear that it expects past policies, which have a lagging effect, will continue to moderate growth and in turn cool down inflation. However, the point is whether the FOMC members share the same view on the situation and have the same assessment on risk of inflation and growth. Heated debate between hawks and doves could be an indication that the tightening cycle is not totally over yet if inflation continues to stay at current levels. This will have heavy influence on market’s reaction to upcoming data even though it’s still expected that Fed will keep rates unchanged again in Sept.


Daily Pivots: (S1) 1.2747; (P) 1.2784; (R1) 1.2814;


EUR/USD’s rebound from 1.2725 was limited below mentioned resistance of 1.2852. EUR/USD fell sharply in early US session, breaking below 1.2772 support, indicating that a top is formed at 1.2838 already and bias is shifted back to the downside. Further decline is in favor towards 1.2725 support and probably a test of 1.2695 cluster support. Above 1.2852 is needed to turn bias back to the upside for 1.2937 high.

However, the overall short term picture remains mixed and more choppy consolidation could still follow as EUR/USD continues to stay below 1.2978 key cluster resistance (61.8% projection of 1.2457 to 1.1908 from 1.2695 at 1.2974) and above 1.2695 cluster support (50% retracement of 1.2457 to 1.2937 at 1.2697).

On the upside, it will take a firm break above 1.2978 to confirm the whole medium term up trend from 1.1639 has resumed. In such case, rise from 1.2457, which represents the last advance in a five-wave sequence from 1.1639 should terminate somewhere between 1.3170 and 1.3234 (61.8% projection from 1.1825 to 1.2978 from 1.2457 at 1.3170 and 78.6% retracement of 1.3668 to 1.1639 at 1.3234) and bring larger consolidation.

On the downside, a break below 1.2695 cluster support (50% retracement of 1.2457 to 1.2937 at 1.2697) will shift favor back to the case that whole rise from 1.1639 has already ended with three waves up to 1.2978 already, after meeting 161.8% projection of 1.1639 to 1.2322 from 1.1825 at 1.2930. Corrective fall from 1.2978 is just part of a larger consolidation which should extend at least a few more weeks with a retest of 1.2457 low before completion.

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