Nerve cells do not regenerate. The second half of EUR/USD begins in a state of heightened nervousness. Investors are weighing whether the minutes of the June FOMC meeting will contain "hawkish" signals and if the labor market can surpass Bloomberg experts' forecasts for the 15th consecutive time. If the answer to both questions is positive, the U.S. dollar will continue its advance.
June was a month of surprises. The U.S. economy amazed with its resilience to the Fed's aggressive monetary policy tightening. Not only is the labor market strong, but retail sales, durable goods orders, consumer confidence, GDP, and unemployment claims have also pleased the eye. And it doesn't stop there. The declining real estate market has started to recover! It's no wonder the U.S. economic surprise index is on the rise, unlike its European counterpart.
Dynamics of economic surprise indices for the eurozone and the United States
The divergence in the dynamics of these indicators allowed EUR/USD to recover from its losses in the first two decades of June. These losses were driven by the market's belief in the determination of the ECB and doubts about the realism of the FOMC's forecasts. 12 out of 18 members of the Committee expected a rate hike to 5.75%, and four members to 5.5%. The CME derivatives did not believe the majority. They assigned a 10% probability of a 50 basis points increase in borrowing costs by the end of 2023.
Positive macroeconomic statistics prompted markets to reassess their views: the chances increased to 35%, and EUR/USD bears managed to lick half of the wounds inflicted on them. Note that the expected peak in rates rose not only for the Fed but also for the ECB and the Bank of England. In the latter case, the expected ceiling is above the 6% mark.
Dynamics of market expectations on central bank rates
Why did investors believe the European Central Bank unlike the Fed? Members of the Governing Council spoke about raising the deposit rate not only in July, but also in September. Meanwhile, the Eurozone economy is not favorably different from the U.S. Not only has it fallen into a recession, but its economic surprise index is also declining. This indicates overestimated expectations of experts. If they were wrong, why should markets not be wrong about two rate hikes in the currency bloc?
Thus, the expected ceiling for the federal funds rate and the U.S. dollar appears underestimated. On the contrary, the euro and the ECB deposit rate seem to have excessive expectations. It is unlikely that they will justify them. However, the final balance of power in the main currency pair will be determined by incoming data.
Technically, EUR/USD is consolidating in the range of 1.086–1.097, forming a Spike and Ledge pattern. In theory, it is played out by breaking the lower ledge boundary at 1.086 for selling or breaking the upper boundary at 1.097 for buying. However, in my opinion, the euro's rise towards the upper boundary of the triangle should be used to form shorts.
