07.11.202223:35 Forex Analysis & Reviews: Inflation and congressional elections. Who will give the dollar a lifeline

The new week promises to be hot for EUR/USD traders. On the one hand, the euro has no reason for any more or less significant recovery. On the other hand, the dollar began to lose ground and this despite the hawkish rhetoric of the Federal Reserve. Mixed data on the labor market gave traders some hope for a dovish turn in monetary policy, although they certainly know that the central bank will not go astray until inflation turns down.

In this regard, players will focus on the US consumer price index on Thursday. It must correct market movements and, if the situation requires it, reverse the trend.

Judging by the confident and somewhat outstripping growth of the EUR/USD pair, traders hope that inflation will witness the passage of the peak. In this case, the quote in the coming days may break through to three-month highs near 1.0200.

Risk appetite, including demand for the euro, did not suffer on Monday, although another speculation appeared on the markets about China's attitude to Covid. Over the weekend, China denied the possibility of abolishing the zero tolerance policy. Judging by the comments of the country's public health officials, it is unlikely that there will be any changes in the near future.

The absence of likely changes is not worth the attention of investors. It is unlikely that this topic will overly affect the mood, but the US midterm elections may well affect the movements of the markets.

The US midterm elections on Tuesday are expected to lead to congressional stalemate. It will be a surprise if the Democrats manage to keep the House of Representatives and the Senate, analysts say.

An unexpected victory for the Democrats could provoke fears that the Congress under their control will continue to increase budgetary spending, contributing to increased inflationary pressure, and hence the strengthening of the dollar.

However, according to the polls, Republicans were the leaders in the election race. As a result, it may turn out that they, along with the Democrats, will receive an equal number of mandates.

Meanwhile, midterm elections tend to have little effect on market movements. Investors are much more active in reacting to economic components, especially after the Fed explicitly announced that it would be guided by incoming data before making further monetary decisions. The CPI will probably make the weather.

Since the situation this year is non-standard and difficult to fit into the historical framework, everything could be different. It is possible that the midterm elections will be of greater importance for the markets.

Thursday's inflation data will affect the Fed's interest rate outlook, so the euro could have two paths. The weakening of the onslaught of inflation will allow the single currency to end this week with growth near the level of 1.0200, and the strengthening will force it to retreat to last week's lows just below 0.9800.

Still, the latter looks the most realistic, since there are other factors besides inflation.

"The key is that the Fed is raising rates while other central banks are signaling the end of the cycle," Goldman Sachs economists commented.

"It is especially important to monitor the market reaction after the sluggish performance of the dollar after two recent key releases - the consumer price index for the last month and the employment report last Friday," the bank said.

The consensus forecast assumes a slight decline in inflation in October. However, any unexpected rise would be bearish for the euro.

TD Securities believes that the figure will be 0.4% m/m (the consensus forecast is at the level of 0.5%). However, it will take several months for the Fed to see if the momentum is waning.

Recall that last week Fed Chairman Jerome Powell made the financial markets think that a possible peak rate is likely to be somewhere above 5%.

"We're not entirely sure why the market finds it hard to come to terms with the idea that this is an unusual cycle. It doesn't take long to realize that the Fed has never stopped its tightening cycle below core inflation on an annualized basis. Why should the worst inflationary shock in decades be different?" TD Securities strategists lament.

The hawkish mood of the Fed in November pushed the dollar to the highs of the year and put strong pressure on the euro. If any higher-than-expected inflation readings on Thursday encourage renewed speculation of this nature, then it would pose a risk for a further EUR/USD recovery.

In the meantime, the EUR/USD technicals are now in favor of a continuation of the upward movement, although its momentum is limited. The quote is dominated by bulls, reflecting the interest in buying in the short term, having partially lost its bearish power.

Resistance settles at 1.0030, 1.0110, then 1.0250. Support is at 0.9815, 0.9670 and 0.9595.