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10.07.202416:49 Forex Analysis & Reviews: The dollar only dreams of peace

The EUR/USD pair is stuck in a narrow trading range, virtually ignoring Jerome Powell's speech in the Senate. Investors felt that the Fed Chairman didn't say anything new, emphasizing the need for additional data to make decisions and refusing to discuss the timing of changes in monetary policy. As a result, US Treasury yields rose, and the chances of a rate cut in September dropped from 78% to 73%.

On the contrary, opponents of the US dollar pointed out the Federal Reserve's shift of focus from inflation to the US labor market. The latter's weakness is key to monetary expansion, which should lead to a drop in the USD index. In practice, things may turn out differently. Even if the Fed cuts the rate by 25 basis points to 5.25%, it will still be high. The yield differential between the US and other bonds won't change much, supporting the US dollar. Aggressive monetary policy easing is required for a prolonged decline, which the central bank is unlikely to undertake.

Dynamics of US Inflation

Exchange Rates 10.07.2024 analysis

Short-term consolidation of EUR/USD is also due to investors' reluctance to rush ahead. They prefer to wait for the US inflation statistics for June before opening positions. Given the Fed's data-dependent monetary policy, this strategy seems reasonable. Indeed, at the bankers' meeting in Sintra, Portugal, Jerome Powell called for patience and described the US economy as strong. However, after the June employment report, he saw signs of a cooling labor market. What will happen after the CPI data is released?

The weakness of the US dollar in the first week of July may be temporary. If consumer prices accelerate, as in the first quarter, the chances of a federal funds rate cut in September will decrease, and Treasury yields will rise, pulling the USD index up.

Weekly Dynamics of the US Dollar

Exchange Rates 10.07.2024 analysis

Moreover, the euro has its vulnerabilities. Credit Agricole believes that political risks in France have remained. A hung parliament and a weak government mean political deadlock and economic slowdown, negatively impacting stock and bond markets. Furthermore, this issue could spread to other Eurozone countries, limiting the EUR/USD rally potential and leading the company to forecast a decline to 1.05 in the coming months.

Danske Bank expects a calm summer for the main currency pair. It will trade around 1.08-1.09, but with the onset of autumn and the increasing risks of Donald Trump winning the presidential election, it will fall to 1.03-1.05 within six months to a year.

Forming an inside bar on the daily EUR/USD chart allows for setting pending buy orders at 1.0835 and sell orders at 1.0805.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Marek Petkovich,
Analytical expert of InstaSpot
© 2007-2024
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