The dollar index sank 1% while S&P 500 approached 4100 points following Powell’s speech on Wednesday, which the market interpreted as an acknowledgement that the pace of rate hikes will be slowed down in December. U.S. bond yields edged down by about 20 bp, reflecting a growing consensus that the Fed will raise interest rates by 50 basis points in December:

News that China is easing Covid measures has given further bullish momentum to commodities and EM currencies.

In yesterday's speech, Powell slightly changed the tone of communication compared to the November meeting of the FOMC. He said at the time that there was still work to be done in terms of raising rates to a restrictive level but said yesterday that the Fed already made significant progress in implementing a restrictive policy. Secondly, the head of the Fed openly stated that the time to slow down tightening may come as early as December.

On the other hand, there is a possibility that the market overreacted to Powell's message. In addition to commenting that it might be appropriate to slow down the pace of tightening, Powell also talked a lot about inflation. In particular, he stressed that the pace of price growth remains stubbornly high, especially in core services, excluding rental housing. In this sector, inflation is a function of wages, and since a quick recovery in labor force participation, according to him, is not expected, the Fed will have to influence inflation by putting pressure on consumer demand, which should increase unemployment, improve the balance in the labor market and limit wage growth, which will eventually quell inflation in this sector.

Consumer price behavior in October could be clarified with the release of Core PCE index today. A monthly slowdown is expected from 0.5% to 0.3%, in annual terms - from 5.1% to 5.0%. A surprise on the downside is highly likely given the October CPI dovish reading and the shift in Powell's rhetoric.

The dollar index is once again approaching the key medium-term support level of 105 points. Consolidation close to the round level occurs in a pecking triangle (bearish pattern), in addition, the struggle is unfolding for another important technical level - the 200-day moving average:

This setup makes it very likely to attempt to shoot below 105 points towards 104.50, where the dollar may be bid by medium-term investors betting that the bearish pullback is done. However, the chances for a reversal, from a technical perspective, could be assessed a little later, and it will depend on the subsequent price action after the breakout, especially if the price manages to find more selling pressure under the key support level. For EURUSD, a breakdown potential of 1.05 and a test of 1.055-1.06 is being formed.