Hawkish signals from Fed officials, voiced against the backdrop of high U.S. consumer inflation, supported the U.S. currency. The dollar index returned to the 102 area, hitting a two-week high, while EUR/USD settled in the 1.11 area after a failed attempt to breach resistance at 1.1260. And although the pair still trades within the wide 1.1130–1.1260 price range, bearish sentiment appears to dominate among traders, in my view. On balance, EUR/USD buyers can mainly hope for a diplomatic breakthrough in U.S.–Iran talks, since all other fundamental factors are currently playing in favor of the greenback.

The CPI report published yesterday fit well with the fairly strong October nonfarm payrolls released last Friday. The releases indicate that the U.S. economy is growing at a reasonably confident pace, the labor market remains resilient, and inflationary pressure is still high. Against this backdrop, rather hawkish comments from Fed officials sounded, which pleased dollar bulls.

Thus, Dallas Fed President Lorie Logan said yesterday that "at least two additional policy rate increases," in total 50 basis points, are necessary. In her assessment the current rate sits at least 50 bps below the level that would deliver moderately restrictive financial conditions. Moreover, she said the Fed may act "faster in winter than in autumn."

It is necessary to recall that after the September rate hike the Fed paused and took a wait-and-see stance in October. Now Logan in effect allows for abandoning that alternation of hikes and pauses in favor of more consecutive tightening.

It is also important to note one more point. Logan singled out that the problem of high inflation is far from limited to energy supply disruptions caused by the Middle East conflict. Prices continue to rise in services, for example, in a sector much less dependent on the Middle East war. This indicates that even a substantial decline in oil prices alone does not guarantee inflation will return to the target. In the Dallas Fed president's view, monetary policy still remains stimulative and continues to feed price pressure, and the longer inflation stays elevated, the higher the risk that inflation expectations among firms and consumers become entrenched.

Logan was far from the only Fed official to issue hawkish signals. For example, Fed governor Christopher Waller went even further, specifying the condition under which the regulator should consider a 50-bp hike in December. In his words, such a scenario would become relevant "if October core CPI rises by 0.3% m/m or more." It is notable he made that statement literally a few hours before the October CPI publication. As we know, headline CPI rose by 0.4% m/m in October versus a +0.3% forecast. Core CPI, in turn, showed 0.3% for the third month in a row, although most analysts had forecast a slowdown to 0.2%. As we can see, Waller's stated "condition" for a more aggressive rate move was fulfilled. Now the question is whether other Fed officials will support such a decisive step at the December meeting.

According to the CME FedWatch tool, the probability of a 25-bp rate hike in December is about 85%, while the chances of a more aggressive 50-bp tightening are around 15%. At the same time, the probability of another 25-bp hike in January (assuming the same move in December) already exceeds 50%.

For the U.S. currency, the important factor is not so much the December rate move itself, which is already largely priced in, as the further trajectory of Fed policy. The market is trying to determine how aggressively the regulator will act within the tightening cycle and at what level it will ultimately stop. Even if the Fed limits itself to a standard 25-bp hike in December (the most likely scenario), the market will continue to live with the expectation of additional steps in January or March.

The combination of persistent inflationary pressure and hawkish rhetoric from Fed officials supports the dollar, which pushed EUR/USD down toward the lower edge of the established 1.1130–1.1260 range.

Notably, even conciliatory signals from Donald Trump this time failed to reverse the situation. The U.S. president, following his meeting with the prime minister of Qatar, again spoke of progress toward ending the war with Iran. However, the market was unimpressed by that rhetoric. Likely because Tehran issued directly opposite signals. In particular, Mohsen Rezaei, Secretary of Iran's Supreme National Security Council, called on Washington to "stop spreading fabrications about alleged negotiations."

Such contradictory statements force traders to treat White House diplomatic optimism more cautiously. De facto, all talk about an imminent peace agreement is not backed by concrete, mutually confirmed arrangements; that is, so far the talk remains only talk.

Thus, the current fundamental backdrop supports further downside in EUR/USD. At the same time, sellers still need to overcome the significant support at 1.1130, which corresponds to the lower Bollinger Band on the daily timeframe. Again, the pair has traded within the wide 1.1130–1.1260 corridor for six consecutive weeks, and during that time bears have not managed to close and hold below the lower boundary. Therefore, short positions in EUR/USD are reasonable either with a target at 1.1130 (if there is sufficient price room for it) or after a confident break below that level and a close under it. Entering shorts directly at the support is rather risky, since the dollar's fundamental advantage does not yet imply the end of the prolonged broad range flat.