So, the most significant events for the EUR/USD pair in June are now behind us. Last week, we learned that: a) inflation in the US is gradually slowing down; b) the Federal Reserve paused its monetary tightening process but allowed for future rate hikes; c) the European Central Bank maintained a hawkish stance despite the slowdown in inflation in the eurozone. As a result, the overall score is in favor of the euro.
The established fundamental backdrop allowed EUR/USD buyers to reach a 5-week price high and approach the 1.10 level. However, despite strong support, traders were unable to even test the resistance level at 1.1000 (upper line of the Bollinger Bands indicator on the 4-hour chart). Therefore, the main battle to conquer the 1.10 level is still ahead. After all, central banks, for the most part, have left room for maneuver: the Fed in the context of a possible rate hike in July, and the ECB in the context of further decisions after the July meeting. Therefore, traders will now focus on macro data and the comments of central bank officials.
In general, the macroeconomic calendar for the upcoming week doesn't have a lot of important events for the EUR/USD pair. The reports are mostly of secondary importance, so the key newsmakers will be members of the Fed and the ECB who will comment on the events of the past week. The focus will be on Fed Chairman Jerome Powell's "two-day marathon."
The Fed chair will begin his two-day testimony in the US Congress on Wednesday. He will first present the semi-annual monetary policy report to the House Financial Services Committee, and the following day (Thursday) to the Senate Banking, Housing, and Urban Affairs Committee. Considering the fundamental importance of this event, it is unlikely for the bulls and the bears to take chances by opening large positions in favor of or against the greenback ahead of this event.
Take a look at the daily chart: after a strong 150-pip rally on Thursday, the pair consolidated in a 50-pip range on Friday and essentially treaded water, with the closing price almost identical to the opening price. Therefore, although momentum-driven growth is possible, it is unlikely.
In my opinion, Powell will exert pressure on the greenback, considering the main points he raised in last Wednesday's press conference. In response to journalists' questions, he stated that the central bank will continue the practice of making decisions "meeting by meeting," meaning there is no predetermined path for rate hikes (despite the updated dot plot allowing for two more hikes this year).
Commenting on the June pause, Powell noted that this decision allows the Fed to gather more information and analyze the dynamics of key indicators before determining whether to raise rates again or not. The Fed chair emphasized that the pace of tightening monetary policy is now less important than finding the end point of the current cycle.
While speaking in Congress, Powell will likely indicate that the central bank has left the door open for additional rate hikes, but he may choose not to exercise this "option," especially if inflation continues to show a downtrend. Take note that the Fed did not provide any direct hints of a rate hike in July, unlike the ECB, whose president announced the decision explicitly.
The traditional "two-day marathon" of the Fed chair in Congress has a somewhat political nature, and considering the preceding events, we can assume that Powell's testimony will have a "moderately dovish" tone.
Recall that back in March, after the collapse of Silicon Valley Bank, followed by the bankruptcies of Signature Bank and Silvergate Capital Corp, the US press accused the Fed of "curing one thing but harming another": by fighting high inflation, it effectively triggered a banking crisis. Afterward, rumors circulated in the market that the Fed might abandon further rate hikes in subsequent meetings. These predictions only materialized in June, but it is necessary to refer to Powell's May speech, where he expressed concern about the consequences of the Fed's implemented measures. He stated that there was uncertainty in the markets regarding the deferred consequences of measures already taken. It was during that time that Powell allowed for a pause in tightening monetary policy, noting that "banking stress" led to tighter credit standards and weakened the need for a rate hike.
Considering the ongoing risks to the banking system and the highly politicized nature of the issue, Powell may shift the emphasis of his rhetoric in Congress by stating that inflation is gradually but consistently slowing down (as evidenced by recent reports), and therefore, the Fed can afford to maintain a wait-and-see position, keeping its finger on the pulse, so to speak.
Such rhetoric would put pressure on the US currency since despite the mixed outcome of the June Fed meeting, the market is pricing in a 25-basis-point rate hike in July. According to the CME FedWatch Tool, the probability of this scenario currently stands at 74%.
If Powell implies that the next rate hike will be extraordinary (only in the case of accelerating inflation), this probability will decrease, and the dollar will face more pressure. In that case, EUR/USD bulls may not only surpass the upper limit of the Bollinger Bands indicator on the four-hour chart (1.1000) but also approach the next price barrier at 1.1080, which corresponds to the upper line of the Bollinger Bands on the weekly chart. On the other hand, if the Fed chair effectively announces another rate hike at the July meeting, bears in EUR/USD can launch a counter-attack, potentially targeting the base of the eighth figure (lower limit of the Kumo cloud on the daily chart). With such a disposition, Powell's speech will become a defining fundamental factor for the EUR/USD pair, at least in terms of the medium-term outlook.
