On Thursday, the dollar finally took a step back, but the rebound of its major rivals looks more like a technical retracement, as the fundamental picture hasn’t changed much. The American currency was weakened by a “relief rally” in risk assets, with the S&P 500 attracting buyers in the support zone we’ve been discussing since the beginning of the week – 4220-4270:

The technical setup for the EURUSD pair worked almost flawlessly: the price reversed in the 1.05 area, where it had found support in January and March of this year. Market participants who bet on a false breakout of the lower bound of the bearish corridor in which the pair has been trading since mid-July of this year may have also contributed to the rebound:

The USD/JPY pair is also trying to reverse, and there were strong technical reasons for it: approaching the “round” level (150 yen per dollar) and the upper boundary of the bullish channel:

Since mid-August, USDJPY has clearly been pushing towards the upper bound of the channel, indicating that there was little resistance from sellers regarding the depreciation of the yen, despite approaching the round level. If this is indeed the case, the medium-term outlook for the yen is not particularly bright; it could easily reach a new low if the US Treasury market offers even higher yields than it does now. There are reasons to believe in such a scenario, as some US money managers, like Bill Ackman, are boldly assuming that the yield on the 10-year bond could reach 5% in the near future. Yesterday, the 10-year bond was trading at 4.68%, and today the market is offering slightly less – 4.54%. 

Inflation data for the Eurozone released today exceeded expectations: core prices in September rose by 4.5% on an annual basis, compared to a forecast of 4.8%. Such price behavior is certainly favorable for the ECB, which would very much prefer not to tighten policy when real output growth is slowing down (which is happening now), thus further burdening the economy. Price data could also explain the strengthening of the European currency, although the behavior of the currency pair is currently mostly dependent on dollar fundamentals, which, as mentioned earlier, has not changed in the absence of macroeconomic news from the US. There is a chance that today’s Core PCE report will shift expectations for the dollar, but for this, we would need to see a strong deviation from the forecast (3.9%) towards lower values. The market may also be influenced by the U. Michigan consumer sentiment report, but again, the market will probably want to see a series of data indicating a negative impulse in the US economy before challenging the Fed’s “higher for longer” narrative. Therefore, the risks of the S&P 500 returning to decline next week and the dollar rising remain high.