Central Bank Decisions and Currency Updates.

USD: Federal Reserve’s Caution May Signal the End of Normalization

The Federal Reserve recently concluded its second-to-last meeting of 2023, opting to maintain its benchmark interest rate at 5.25% to 5.50%. While some hawkish elements were present in Jerome Powell’s press conference, his conviction for further rate hikes seemed absent, indicating the potential end of the normalization cycle. The U.S. dollar might be reaching its peak as policymakers exercise caution in the face of inflation. To confirm this assessment, incoming data will need to reveal a rapid deterioration in the economic outlook due to increasingly restrictive financial conditions.

GBP: Stubborn Inflation Challenges Bank of England

In the UK, inflation remains the highest among major economies and has proven resistant to efforts to contain it. Bank of England officials anticipated a significant drop in inflation due to tighter financial conditions, but actual prices have remained elevated. While headline CPI has shown some improvement, core inflation has declined more slowly, and services inflation has picked up. The Monetary Policy Committee (MPC) will require further data showing a decline in inflation before considering a change in policy.

EUR: Euro Area’s Bearish Outlook in Currency Markets

Euro Area faced disappointing data recently, causing the EUR/USD pair to initially drop. However, it reversed course after bouncing off medium-term trendline support. The underlying bias for the euro remains bearish, but for losses to accelerate, bears must push prices below 1.0535, potentially leading to a move toward the 1.0500 level. On the upside, a bullish resurgence could find initial resistance at 1.0670 to 1.0695, with further gains potentially reaching 1.0765, marked as the 38.2% Fibonacci retracement of the July/October descent.

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