EUR/USD: US inflation drowned out the upward impulse

Source: Forex Analysis

Data on the growth of US inflation was very controversial. The general consumer price index showed mixed dynamics: on a monthly basis, it remained at the level of May (that is, at the level of 0.1%) with the forecast of decline to zero. In annual terms, the index came out in accordance with the forecast, being at the level of 1.6% (previous value – 1.8%). But core inflation has pleased investors with minimal growth. On a monthly and annual basis, CPI turned out to be better than forecast, coming out in the “green zone” (0.3 m/m and 2.1% y/y)

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After the release of this report, the market hesitated for a while – on the one hand, the inflation rate was pleasantly surprising (especially the base one), on the other hand, the growth of the main indicators was minimal. But an hour later, the market decided that “the glass was half full” than vice versa, and so the US currency gradually began to restore its position. The dollar index moved away from lows of the day (and week), rising from 96.417 to the current value of 96.620. Although the growth of the greenback is not of a large scale, this situation indicates that the upward impulse of the EUR/USD pair is too unsteady and uncertain, and the dollar, in turn, retains the potential for further growth. After Powell’s pessimistic comments and the release of the dovish Fed minutes, such dynamics from the greenback looks abnormal. But if we consider this situation in terms of market expectations, many things fall into place.

By and large, the Fed follows the expectations of the market, and to be more precise, it prepared the traders fairly smoothly and well in advance for their further steps. Representatives of the dovish wing of the Fed (James Bullard, Rafael Bostic, Lael Brainard) first spoke about the need to mitigate monetary policy. Then the likelihood of such a scenario did not exclude Jerome Powell, however, as a necessary (extreme) measure. Over the coming weeks, the Fed chief strengthened the dovish tone, allowing for a rate cut this year. In the end, at its June meeting, the Fed excluded from the text of the accompanying statement the phrase “showing patience” regarding the prospects for monetary policy, thus opening the door to the first rate cut. Thus, the probability of monetary policy easing gradually grew and reached almost 100% at the end of last month. Moreover, the market began to exaggerate information that the Fed would reduce the rate immediately by 50 basis points or start a rate reduction cycle (one decrease in July, one more in the fall). Against the background of such conversations, the dollar has noticeably weakened – in particular, the EUR/USD pair even tested the 14th figure for the first time since March of this year.

But strong Nonfarm weakened the fears of traders about an aggressive rate cut. At the same time, the likelihood of a July decline was still preserved. That is why the dollar relatively calmly survived Jerome Powell’s unambiguously dovish report to Congress. Despite the clear hints of the Fed, the dollar just moved away from annual lows against the euro, but buyers could not even enter the area of the 13th figure. The thing is that the market was ready for the July rate cut – the only question was how aggressive the Fed’s actions would be after this “preventive” step. In turn, today’s data on inflation has suggested that the Fed will take a wait-and-see position following the decline in July.

In other words, the Fed has been preparing the markets for monetary policy easing for quite a long time. Therefore, the Fed chief’s semi-annual report did not provoke a large-scale weakening of the dollar. If we talk about the EUR/USD pair, in this case, Powell only interrupted the downward trend and allowed the pair’s bulls to go for a correction, the “ceiling” of which is 1,1300. This ceiling is not only due to the growth of core inflation in the United States.

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The single currency is also under pressure from the fundamental background, primarily from the ECB. So, the minutes of the last meeting of the European regulator was released today, which demonstrated the dovish intentions of the ECB. In the opinion of the members of the Governing Council, the regulator needs to prepare for easing monetary policy in view of the reduction in inflation expectations. Almost all representatives of the ECB agreed that the central bank needed to change its position, demonstrating readiness for “retaliation”. Arsenal of possible measures includes both the resumption of QE and lower interest rates. It is not known what algorithm of actions the regulator will choose for itself, but at the same time it is obvious that the ECB will take the path of easing monetary policy – just like the Fed.

This fact limits the potential correctional growth of the EUR/USD pair. The first resistance level is the mark of 1,1285 (the middle line of the Bollinger Bands indicator on the daily chart, which coincides with the Tenkan-sen line). Today, the pair has reached this level, but was unable to break through it, and after the publication of the US CPI, it retreated to the level of today’s opening. Just above – at around 1.1300 – is the next resistance level, which corresponds to the Kijun-sen line. But if the demand for the dollar will increase (especially if tomorrow’s producer price index will be released in the “green zone”), then the pair will most likely return to the base of the 12th figure, namely, to the support of 1.1205, which corresponds to the lower Kumo cloud on D1.

The material has been provided by InstaForex Company – www.instaforex.com