FX.co ★ Inflation fuels the dollar's ambition, but what if the Fed fails

Shocking data on inflation in the United States echoed throughout the foreign exchange market. The dollar has jumped and is trying to overcome the 95.10 barrier on the index. Concerns about price pressures in the global economy have intensified among investors. Now they have begun to wonder not only whether the Federal Reserve will start raising rates next year, but also about the timing and scale of policy tightening.

The US central bank cannot but react to such a price increase, economists say. Therefore, before the next meeting, which is scheduled for December 15, turbulence in the markets will increase.

Why is inflation increasing and who can stop it?

In terms of inflation, the Fed is seen as a lifeline, but is the central bank able to cope with this process on its own? To answer this question, first you need to clarify the factors contributing to the increase in inflation. There are two of them, this is an increase in energy prices (gasoline is getting more expensive for the same reason) and a shortage of semiconductors (new cars are getting more expensive).

The problems contributing to the acceleration of inflation did not appear yesterday, and they are unlikely to be within the power of the Fed. Can the central bank solve the issue of rising gasoline prices? This is a stone in the garden of the American government. It's not that there have been no attempts from the authorities, US President Joe Biden is trying, but unsuccessfully. It is not possible to put pressure on OPEC, we will have to extract strategic oil reserves to increase supply at least within the framework of our state. There is another idea – the Democrats proposed to ban oil exports to the United States.

Some actions will be taken. High inflation began to hit Biden's rating harder, who immediately after the release of unpleasant statistics called the task of slowing price growth paramount.

Oil shortages and logistical problems are where the root of the problem lies. Will the Fed be able to establish logistical ties and solve the oil shortage by raising the rate? Of course not. Consequently, accelerating inflation should not push the US central bank to raise the rate earlier, as the markets expect, since inflation is not monetary in structure.

At the same time, the dollar rose on market expectations of an earlier tightening of policy. This was the first reaction–impulsive, thoughtless and, perhaps, excessive. Investors will be impressed by the inflation data for some time. As a sober assessment of the situation, a correction of the dollar may occur.

In general, the forecast for the US currency remains unchanged, what is happening is only good. The greenback is expected to continue to grow over a long distance, but not so much and not without multi-day pullbacks.

The macroeconomic and technical picture speak in favor of continued growth of the dollar in the short term. So far, the index has managed to stay above the previous highs near 94.50, but it can continue to grow straight to the round mark of 96.00.

The dollar and gold are among the winners from inflation in the United States, and among the victims are the euro. Experts call the root cause of the fall of the EUR/USD pair with an increase in the spread between US and German government bonds. The euro is likely to remain under pressure until the end of the week. The 1.1300 level appeared on the radar.

At the moment, the pair has reached the overbought area, but there are no signs of a reversal yet. Support is marked at 1.1450, 1.1410 and 1.1370. The resistance is 1.1515, 1.1550, 1.1600.