The euro has been trading sideways against the dollar between 1.0985 and 1.1045. There was renewed upward momentum during the early hours of Thursday until the recent U.S. data disrupted the balance.
The next potential target for the price was 1.1070, due to the continued decline of the U.S. dollar after the U.S. Consumer Price Index (CPI) report for July showed that price pressures remained in line with market expectations.
The U.S. Dollar Index (DXY) is now trading near 103.22 following recent U.S. retail sales and unemployment data.
The U.S. CPI report from yesterday indicated that monthly inflation and core inflation (excluding volatile food and energy) increased by 0.2%, as expected.
The annual CPI rose at a slower pace of 2.9%, down from the June reading of 3% and estimates. Meanwhile, the core CPI slowed to 3.2%, as anticipated, from the previous reading of 3.3%.
Today’s U.S. retail sales data showed an increase of 1.0%, significantly higher than the estimated 0.4%. Core retail sales came in at 0.4%, above the previous 0.0% and as expected. U.S. jobless claims were reported at 227,000, lower than the expected 236,000.
These data points suggest the strength of the U.S. economy and that it might be far from a recession, contrary to many expectations. Thus, these figures could support a more hawkish stance from the Fed on interest rates and diminish expectations for a rate cut soon.
From my perspective, the Eurozone economy currently lacks significant data. Additionally, a recovery in the Chinese economy still seems distant. However, the prospects of convergence between the U.S. economy and lower interest rates elsewhere in the world are supporting the EUR/USD pair. This is evident in the forex options market, where the one-month call option for the euro has turned positive compared to the one-month put option for the first time since February 2022.
Despite the EUR/USD pair dropping to 1.0950 after strong U.S. data today, I expect the pair to find support at 1.0945, which could lead to a rebound towards 1.110. However, stronger U.S. economic data might drive the pair down towards the key demand level at 1.0823. Thus, we should be cautious as the realized volatility of the pair has been exceptionally bearish over the past two years, and breaks of key levels are important to confirm short- to medium-term price trends.
Regarding interest rates, Atlanta Fed President Raphael Bostic mentioned earlier this week that recent developments have increased the Fed’s confidence in returning inflation to 2%, but more evidence is needed to support a rate cut. The divergence in U.S. inflation and unemployment data is likely to make Fed officials wait longer to ensure inflation is on track to meet the 2% target at a reasonable pace.
In my opinion, following these statements and strong retail and unemployment data, market expectations for a sharp Fed rate cut in September might decline. Currently, the market prices in a 41.5% chance of a 50 basis points rate cut in September, down from 54.5% before today’s data, which the markets are still trying to absorb. I believe the Fed might not cut rates until the end of the year or early next year, aiming to see more stable data showing a gradual decrease in inflation towards its target.
Meanwhile, Eurozone economic data revealed a 0.3% quarter-over-quarter growth in Q2 compared to the first three months of the year. Every year, the economy grew by 0.6%. Both figures were in line with market expectations and may bolster the euro in the short term.
In my view, the upside potential for GDP growth may be limited, especially as recent figures raise doubts about the strength of the services sector, leading to expectations of weak GDP growth for the rest of the year. Markets anticipate another ECB rate cut in September, but economic forecasts remain weak after the ECB kept interest rates unchanged at its July meeting.
With the recent decline in the U.S. dollar, U.S. 10-year bond yields have decreased significantly. Before the inflation report yesterday and today’s retail sales and unemployment data, there was a 54.5% expectation for a 50 basis points rate cut in September. However, today, I believe the market will reprice these expectations, especially with reduced concerns about a more extensive tightening of monetary policy. This drop in bond yields reflects an easing in expectations for further rate hikes, supporting the euro and increasing its demand. However, it also reduces rate cut expectations, which negatively impacts the markets and supports the dollar in the short to medium term.
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