FX.co ★ US Dollar Strength May Continue as EUR/USD and AUD/USD Face Further Declines

Rising inflation in the United States has revived discussion about the possibility of interest rate hikes this month.

Financial markets were caught off guard by US consumer inflation data, which exceeded expectations in both headline and core terms, surpassing all forecasts. This suggests that inflation is indeed accelerating. Naturally, the issue has revived market speculation about the possibility of the Federal Reserve raising interest rates at its October meeting. Yesterday, immediately before the report was released, federal funds futures indicated an 80% probability that rates would remain unchanged this month. Today, however, that figure has shifted, with the probability now standing at 68.4%. Expectations that interest rates will remain unchanged may continue to decline gradually, while expectations of a rate hike may increase.

So, what can be expected in the near future as the outlook for US interest rates is reassessed?

Federal Reserve Chair Kevin Warsh is scheduled to speak today. His assessment of the prospects for further rate hikes will be crucial. If he states that the regulator's future interest rate decisions will continue to depend on incoming economic data, any significant economic releases could trigger sharp market movements. Higher inflation figures and other important reports, such as retail sales data, could drive market volatility by fueling speculation about a possible rate hike following the Fed's two-day meeting on October 28. As data supporting demand for the US dollar are released, the currency may come under increasing pressure on the Forex market.

What can be expected in the markets today?

The overall consolidation is likely to continue, with more significant market movements potentially beginning tomorrow as traders react to the inflation report.

Daily Forecast:

EUR/USD

The pair is trading below the resistance level of 1.1235. It may reverse to the downside and fall toward 1.1112. The 1.1207 level could serve as an entry point for short positions. A stop-loss order could be placed at 1.1254.

AUD/USD

The pair remains under pressure amid renewed expectations of US rate hikes, while Australia's central bank is expected to maintain its pause. Weak conditions in the Australian labor market are discouraging the Reserve Bank of Australia (RBA) from resuming rate hikes, which is weighing on the Australian dollar.

The pair may initially decline to 0.6912 and then to 0.6882. The 0.6932 level could serve as an entry point for short positions. A stop-loss order could be placed at 0.6974.