Do not rush into hell, folks. This is the strategy that investors are adopting, closing long positions on EUR/USD ahead of the eventful last full week of July. The rally of the main currency pair was triggered by the slowdown in American inflation and expectations that the Fed will become less "hawkish" after that. However, what if it's not the case? The answer to this question will be revealed after the FOMC meeting on July 25–26. So, would it not be better to stay out of the market?
If the Federal Reserve's monetary policy depends on the data, it is easy to assume that the deceleration of consumer price growth to 3% in June will be the basis for ending the cycle of tightening monetary policy. Indeed, immediately after the release, the probability of raising the federal funds rate to 5.75% in 2023 dropped from 36% to 18%. The market stopped believing in the FOMC's forecasts and was not afraid of it. Investors paid the price for their overconfidence in 2022, but now the situation is different. They are convinced of the central bank's mistake.
At the same time, understand that monetary policy does not depend on a single report. A set of data is needed. Moreover, in the conditions of a strong economy, it is difficult to count on rapid inflation movement towards the 2% target. Recently, actual data from the U.S. regularly exceeded forecasts. This has led to a continuous rise in the Economic Surprise Index.
Dynamics of the US Economic Surprise Index
If the United States is strong like a bull, it is hard to imagine not only low inflation but also a weak currency. Bank of America believes that despite the general positive sentiment, caution is needed. They are skeptical of both the fast pace of disinflation and the changing measures of the Fed to combat high prices. This allows the bank to predict the strengthening of the U.S. dollar against major world currencies in the second half of 2023.
To sell EUR/USD, one must be a pessimist, believing that the U.S. economy will eventually succumb under the pressure of the Fed's most aggressive monetary tightening in decades, China will not recover, and the eurozone will remain stuck in recession. However, contrary to this outlook, some believe in the sustainability of the American economy and the acceleration of China's GDP. They hold the belief that the currency bloc will exhibit better performance in the future than in the past. Bloomberg experts share this optimistic sentiment and identify high inflation as the main risk for the eurozone, rather than GDP growth.
Dynamics of the main risks for the eurozone economy
If all goes well with the global economy, pro-cyclical currencies, including the euro, will gain popularity. Pressure on the U.S. dollar will be exerted by the end of the Fed's monetary tightening cycle and improvement in global risk appetite.
Technically, on the daily chart of EUR/USD, a Three Indians pattern has formed. If quotes fall below the low of the second Indian's bar near 1.097, we can talk about a trend reversal. Until this happens, we focus on buying euros on rebounds from the supports at 1.106 and 1.101.
