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EUR/USD: Between Powell’s speech and the European central bank

2nd Jul 24 3:32 pm

After opening this week on a notable rise, the EUR/USD pair climbed to its highest level in over two weeks, reaching above 1.0770 yesterday.

However, on Tuesday, it lost momentum and fell below 1.0750.

The EUR/USD pair is still in a downtrend, pressured by the expected decline in June’s preliminary Eurozone Consumer Price Index (CPI) data.

As expected, the annual CPI slowed to 2.5%, and the core inflation measure rose steadily due to stable service inflation. Price pressures in the services sector increased in line with the 4.1% recorded in May.

The current inflation readings are unlikely to provide clear signals regarding the direction of price pressures.

Yesterday, the preliminary German CPI report for June showed that price pressures decreased more than expected, which would encourage the European Central Bank (ECB) to make successive interest rate cuts. However, officials refrained from outlining a specific path for rate cuts, fearing that an aggressive policy-easing campaign could reignite price pressures.

ECB President Christine Lagarde said at the ECB Forum on Central Banking yesterday: “It will take some time to gather enough data to ensure that above-target inflation risks have subsided.” She added, “The strong labour market means we can wait longer to gather new information.

In my view, the uncertainty leading up to the second round of the French elections scheduled for July 7 could also cause euro volatility. According to opinion polls from the first round of the French parliamentary elections, the far-right National Rally party, led by Marine Le Pen, is in a comfortable position but with a smaller margin than expected.

The US Dollar Index (DXY) also rose sharply, approaching 106.00. Meanwhile, investors are looking for more signals on when the Federal Reserve might start cutting interest rates this year. Therefore, investors will focus on the speech by Federal Reserve Chairman Jerome Powell today.

From my perspective, financial markets expect the Federal Reserve to start cutting interest rates from the September meeting. The Fed is expected to cut rates twice this year, compared to only one cut forecasted by Fed policymakers.

Apart from Powell’s speech, I believe investors will also focus on the May job openings data, which will be released today. Economists expect employers to announce 7.9 million job openings, slightly down from April’s reading of 8.06 million.

I think Powell and Lagarde’s remarks will highlight the divergence in monetary policies between the Federal Reserve and the ECB. Therefore, I believe the EUR/USD pair will extend its decline in the American session today, and investors may continue to price in a rate cut by the Fed in September, which could put downward pressure on the US dollar if Powell acknowledges improved inflation.

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