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EURUSD: Weekly Analysis & Outlook

The dollar eased and global equities rebounded on Friday as Wall Street rallied on doubts that interest rates will go higher even after Federal Reserve Chair Jerome Powell cautioned that tighter monetary policy might be needed to tame inflation. Powell’s remarks on Thursday that the fight to restore price stability “had a long way to go” at first roiled markets. But a softer labor market as seen in last week’s unemployment report and speculation that next week’s consumer prices index (CPI) will show slower inflation spurred bulls into action. “Even with Powell’s commentary yesterday, for the most part that’s been shrugged off as sounding too hawkish. People are not really convinced that the Fed is going to be raising rates going forward,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. “Too many people were far too over their skis on the short side, both of equities and bonds, and you’ve seen that reverse in a huge way in the course of the last week.”

Many investors embraced the notion that U.S. rates have peaked after the Fed kept its overnight lending rate steady last week, a move that bolstered speculation the tightening cycle was over and spurred a rally in risky assets until Thursday. Thierry Wizman, global FX and interest rates strategist at Macquarie in New York, said with the decline in gasoline prices the CPI data could surprise to the downside. “We could also see some downside surprises in the core components of rents, for example, air fares, new cars, etc,” he said. “If we were to get a low CPI next week, yields can come down around that number and we may get some weakening in the dollar.”

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