Last week, the EUR/USD pair completed a five-day marathon almost at the starting level (opening price - 1.1027, closing price - 1.1008). Both sellers and buyers suffered losses. EUR/USD bulls failed to settle above the 1.1030 target (the upper line of the Bollinger Bands, coinciding with the lower band of the Kumo cloud on H4), while bears couldn't maintain their positions below the 1.0950 mark (the lower line of the Bollinger Bands on the same time frame). The conflicting fundamental backdrop didn't tilt the scales in either direction – traders once again found themselves at the "zero point," within the price range of 1.0950-1.1030. However, very soon market participants will be in the midst of price turbulence again, as the coming days will be dominated by the focus on US inflation.
In the upcoming week, the US will release several crucial inflation reports. The most significant among them is the report on the Consumer Price Index (CPI) growth, which will be released on Thursday, August 10. According to preliminary forecasts, the CPI is expected to rise in July, while the core index is expected to slightly slow down. Most experts believe that the CPI will reach 3.3% (it decreased to 3.0% in June). On one hand, such a "pullback" is minimal, but the trend itself is essential. The CPI has consistently decreased for 12 (!) months. If it reaches the forecasted level in July (let alone entering the "green zone"), the index will accelerate for the first time since June 2022. In monthly terms, inflation should also demonstrate an uptrend, rising to 0.4%.
The market will focus on the core CPI, which excludes food and energy prices. On the contrary, both yearly and monthly calculations are expected to fall. In yearly terms, the core CPI is expected to reach 4.7%. Such a result might disappoint the dollar bulls. The core index has been consistently decreasing for the last three months, and in June, it reached 4.8% - the weakest growth rate since November 2021. If the core CPI meets the forecasted level, it would indicate a persistent downtrend, leading to certain consequences we will discuss below. However, if the core index resumes its growth against the predictions, the dollar will strengthen its positions across the market.
In addition, the Producer Price Index (PPI) report will be published this week (Friday, August 11). Take note that this indicator can signal changes in inflationary trends. Most experts believe that the index will rise, with both the overall and core indices showing positive dynamics, excluding food and energy prices. If these indicators enter the "green zone," the dollar will receive additional support. In this case, the trend itself is significant, as the overall PPI, for example, has consistently decreased for the past 12 months in yearly calculations.
The significance of the aforementioned reports cannot be overstated, given the outcome of the July Federal Reserve meeting. According to Fed Chairman Jerome Powell, the further prospects of monetary tightening will depend on the dynamics of key macroeconomic indicators, with the September meeting possibly resulting in either a rate hike or keeping rates unchanged. In other words, the fate of the interest rate is now in the hands of major economic data, primarily in the area of inflation.
Recall that the inflation reports for June all turned out to be in the "red," reflecting an active decline in the corresponding indicators. This includes the core Personal Consumption Expenditures (PCE) Price Index, which measures the core level of spending and influences inflation in the US (it is considered that this indicator is closely monitored by members of the central bank). The Fed's most preferred inflation gauge also ended up in the "red," declining to 4.1% - the weakest growth rate of the indicator since October 2021.
If the pace of July inflation accelerates (as many experts predict), the likelihood of keeping rates unchanged at the September meeting will decrease, and, consequently, hawkish expectations will rise. However, if July inflation follows the trajectory of June's, the dollar will come under significant pressure.
By the way, according to data from the CME FedWatch Tool, the probability of maintaining a wait-and-see position in September is 72% (consequently, the probability of a 25-basis-point rate hike is 28%). Inflation reports can strengthen traders' hawkish sentiment, especially since preliminary forecasts allow for such a scenario. But in another case, the dollar will once again be "caught off guard" and expose its vulnerability.
