Approximate dates for the end of the dollar rally in the foreign exchange market appeared

The trend for the dollar remains upward, despite the current weakness. Short-term strength is still likely, which means there is still a risk of renewed lows for the euro and pound. The question is, how much can the dollar rise?

  • The nearest event that could revive the dollar or, on the contrary, further intensify the downward correction will be the publication of inflation. 
  • It can hardly be relied upon as a driver that can make the weather over the long term. 
  • The important indicators will be November and December inflation and these figures will be used by traders as a basis for further plans regarding the unemployment rate.

With what is happening in the markets, it is important for traders to always use stop losses. After all, lowest spreads are not the only thing that is important for profitable trading. Stop losses, fix losses, which, of course, is an extremely unpleasant situation for every trader. To make it easier to handle losses, treat them as insurance. You pay for this insurance against big losses. 

Rising unemployment and its influence on the currency market

Because there was an unexpectedly sharp increase from 3.5% to 3.7% in October, markets will be watching this component of the U.S. labor market closely. If it continues to rise along with slowing inflation, the dollar risks weakening as it would be a hint of a slower Fed rate hike within 50 bps and then even weaker until the cycle is complete.

So far the Fed has nothing to worry about; the labor market looks healthy, but there is some limit to the numbers that will make regulatory officials think twice and slow down the monetary move.

There is reason to believe it is a rise in unemployment above 4%. If unemployment continues to rise in November, market players will be wary. It will be much harder for the Fed to decide to raise rates. As early as December, the Central Bank could raise rates by 25 bps or abstain.

This is ground for thought for the longer term, as for the coming days, the markets will analyze the inflation figure from different angles. It is expected to fall from 8.2% to 8%. With the indicator falling below 8%, markets may start to pivot to a slower pace of Fed policy tightening.

Although the dollar is not yet ready to reverse its downward trend, it will probably now be in the final phase of its multi-month rally.

The U.S. Central Bank is nearing the end of its tightening cycle and, as a consequence, the scope for further increases in the expected interest rate differential in favor of the dollar is limited. Again, this is not to say that the dollar will go to rock bottom; it will stop rising. The reversal should only happen after the Fed completes the cycle. The end of the period of dollar strength will probably be the second half of 2023.

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