What are the catalysts behind the new currency movements?

The US Dollar breaks through some resistance levels.

The euro is at its lowest level in the last year, mainly due to forecasts for Germany’s GDP in 2024, which are entering negative territory, with the likelihood of fiscal hawks taking control by February.

Daily chart of EURUSD What is the catalyst for the movement?

It is not entirely clear, as yields on government bonds have decreased in the short term today, while in the long term, they remain unchanged. The Consumer Price Index (CPI) report faced some issues, one of which is rent inflation, which RBC highlighted.

“Two-thirds of the annual increase in core prices comes from large components of housing rents, and the growth in these will slow down as slower growth in rental prices in the market will reflect on CPI growth with a lag when lease renewals occur… However, according to our calculations, the scope of inflationary pressures in components outside of housing has also expanded. According to our calculations, the share of the CPI basket, excluding rents, with price growth above 3% year-on-year over the last three months increased to just below 50% in October. This is still far below the nearly 90% levels of 2022, but higher than under 30% in the summer.”

“It seems that most forecasts (including those of the Federal Reserve) have been wrong regarding rent inflation, which simply refuses to fall.”

RBC is thought to have the correct perspective on this issue, given the lags, and this is how RBC sees it.

Given the current enthusiasm for growth, the Federal Reserve’s pause is inevitable. December futures point to a 15% chance of no change, and these things usually happen faster than people expect.

That said, the next step is expected to be another rate cut in December, followed by a pause that could last into the first quarter and even longer if data continues to show good results.

Today, there were also comments from Kashkari and Logan, and the theme of optimism regarding growth was clearly expressed. Kashkari also spoke yesterday, highlighting the potential for a higher neutral interest rate. This was something Logan also mentioned, stating that models show they might now be near neutral levels.

She said that the Federal Reserve “will likely” need to take further cuts but must “proceed cautiously,” which is not exactly a signal for a large rate-cutting cycle. Unlike Europe, which needs help.