12.08.202613:43 Forex Analysis & Reviews: Level and Target Adjustments for the U.S. Session – August 12

The euro and British pound performed quite well today using the Mean Reversion strategy. I traded the Japanese yen using Momentum, and it showed a notable strengthening against the US dollar.

In the first half of the day, the euro reacted with gains to news that inflation in Germany accelerated to 2.8% in June. The Consumer Price Index reflects the pace of price growth and directly affects expectations regarding ECB policy, as the stronger the inflation, the stronger the arguments in favor of a more hawkish stance by the central bank. This is why the single currency responded to the acceleration with gains. However, an important detail is hidden behind the headline figure, changing the interpretation of the report. The reason for the acceleration is clear, as fuel made the largest contribution, rising by as much as 11.2%. At the same time, core inflation was only 2.4%, meaning that the increase was purely energy-driven.

The core measure is considered a more accurate indicator of persistent price pressures, and its subdued reading indicates that there has been no fundamental acceleration in prices and that the increase was entirely driven by higher fuel prices. For the ECB, this is an unfavorable signal, as the energy shock has returned to the statistics of the bloc's largest economy precisely when the central bank had been counting on sustained disinflation.

The market is now awaiting much more significant data from the United States, namely the Consumer Price Index and its core measure, which excludes food and energy prices. The Consumer Price Index reflects the pace of inflation and is considered one of the key indicators for the Fed, as price dynamics determine whether the central bank will tighten or ease monetary policy. The core measure is considered more important because it excludes volatile components and provides a more accurate picture of persistent price pressures.

The importance of this report for the dollar is difficult to overstate. A sharp increase in inflation would strengthen the case for a more hawkish Fed stance, pushing US bond yields higher and strengthening the dollar. A weaker reading, by contrast, would reduce expectations of monetary policy tightening and remove support for the currency, so the market will be closely watching the deviation of the actual figure from the forecast.

If the data are strong, I will rely on the Momentum strategy. If there is no significant market reaction to the data, I will continue using the Mean Reversion strategy.

Momentum Strategy (Breakout) for the Second Half of the Day:

For EURUSD

• Buying on a breakout of 1.1550 could lead to a rise in the euro toward 1.1579 and 1.1620.
• Selling on a breakout of 1.1528 could lead to a decline in the euro toward 1.1516 and 1.1502.

For GBPUSD

• Buying on a breakout of 1.3527 could lead to a rise in the pound toward 1.3554 and 1.3581.
• Selling on a breakout of 1.3490 could lead to a decline in the pound toward 1.3464 and 1.3435.

For USDJPY

• Buying on a breakout of 159.39 could lead to a rise in the dollar toward 159.60 and 159.83.
• Selling on a breakout of 159.13 could lead to a decline in the dollar toward 158.83 and 158.57.

Mean Reversion Strategy (Return) for the Second Half of the Day:

For EURUSD

• I will look for selling opportunities after a failed break above 1.1553, followed by a return below this level.
• I will look for buying opportunities after a failed break below 1.1528, followed by a return to this level.

For GBPUSD

• I will look for selling opportunities after a failed break above 1.3534, followed by a return below this level.
• I will look for buying opportunities after a failed break below 1.3486, followed by a return to this level.

For AUDUSD

• I will look for selling opportunities after a failed break above 0.7082, followed by a return below this level.
• I will look for buying opportunities after a failed break below 0.7050, followed by a return to this level.

For USDCAD

• I will look for selling opportunities after a failed break above 1.3945, followed by a return below this level.
• I will look for buying opportunities after a failed break below 1.3914, followed by a return to this level.