Markets apparently overreacted to the June CPI and PPI reports. While both inflation measures eased, the slowdown is not enough to break the broader upward trend. That should provide support for the US dollar. Let’s examine the situation and develop a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The EUR/USD pair’s rally has stalled.
- FOMC officials are prepared to raise interest rates.
- Geopolitical factors support the US dollar.
- Trading the EUR/USD pair within the 1.1370–1.1470 range remains the preferred strategy.
Weekly Fundamental Forecast for Dollar
The markets made the very mistake that Kevin Warsh had warned them against. In his testimony before Congress, the Fed Chair stated that investors should not focus on isolated data points—the trend is what matters. However, investors were so encouraged by the CPI and PPI figures that they sharply reduced the likelihood of a rate hike. No one knows what will happen with the indicators in July. This insight prevented the EUR/USD pair from breaking above the upper boundary of the 1.137–1.147 consolidation range.
If inflation is not moving toward the 2% target on its own, the Fed needs to take action to help it get there. This apt remark by Dallas Fed President Lorie Logan accurately captures the prevailing sentiment within the FOMC. Officials consider the current rate level comfortable, but if prices do not continue to slow, they are prepared to increase the interest rate. This view was expressed by Lisa Cook and Phillip Jefferson.
As a result, triggered by CPI and PPI reports, Kevin Warsh’s remarks that AI will not necessarily fuel inflation, and John Williams’ speech that prices have peaked, the rally has stalled. Investors realized that there is a rift within the FOMC. Against this backdrop, anything could happen at the July meeting.
Market Expectations for Fed Interest Rate
Source: Bloomberg.
Meanwhile, the escalation of the conflict in the Middle East is boosting the US dollar. The US has begun bombing bridges, while Iran is threatening to attack the infrastructure of Gulf states. At the same time, the US maintains that Tehran continues to seek avenues for negotiations. When there is no unity within the government, such contradictions come as no surprise to anyone.
At the same time, Iran understands that as the conflict drags on, the economy and people will suffer. In contrast, hardliners want nothing to do with the Americans. This explains the failure to comply with the terms of the deal signed in June.
The longer the standoff between the US and Iran lasts, the longer oil prices will remain above pre-war levels, and the greater the likelihood that they will feed into core inflation. Its slowdown in June may be short-lived, and a resumption of the upward trend in the CPI may prompt the Fed to increase the interest rate. If so, investors began selling the US dollar too early.
Goldman Sachs, on the other hand, lowered its EUR/USD forecast for the 6- and 12-month horizons from 1.18 and 1.2 to 1.12, citing the wide spread between the Fed’s and the ECB’s interest rates.
Weekly Trading Plan for EUR/USD
Bulls have failed to push EUR/USD quotes above the 1.1370–1.1470 consolidation range. As long as the pair remains trapped within these boundaries, the preferred strategy is to sell rallies and buy dips.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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