Positive sentiment among European investors resulted in a local stock rally, as well as a rise in commodity asset prices. This put pressure on European currencies. However, the decline in both EUR/USD and GBP/USD will likely be limited.
The latest inflation data in the UK showed that CPI decreased significantly from 8.7% to 7.9% y/y in June, following a slight rise in May. This means that the Bank of England may not raise rates again at the upcoming meeting, but it will not stop the bank from further increasing borrowing costs, since inflation remains at 7.9%, far above the target level of 2%. This led to a decline in GBP/USD, after surpassing 1.3000.
Meanwhile, CPI in the eurozone remained in line with expectations, showing a drop from 6.1% to 5.5% y/y and an increase of 0.3% m/m. EUR/USD almost remained unchanged because of this.
As the levels of inflation remain high and above 2%, both the ECB and the Bank of England will likely be forced to resume interest rate hikes after a possible pause at the upcoming meetings. In such a scenario, there will be a rise in EUR/USD and GBP/USD after a short-term correction, which will intensify if US inflation continues to decrease to 2% and the Federal Reserve refrains from raising interest rates any further. In this case, the market will start expecting a possible start of rate cuts in the US to stimulate economic growth early next year.
Look for opportunities to buy both pairs during local declines, with prospects for noticeably stronger growth than before.
Forecasts for today:
EUR/USD:
The pair continues to consolidate above 1.1200. Further growth beyond 1.1255 may lead to a rise towards 1.1400, which may be reached as early as next week.
GBP/USD:
The pair will likely remain above 1.2845, which will further enhance the upward potential. An increase above 1.2965 will result in a rise to 1.3145.
