Over the weekend, US President Donald Trump said that the White House will not devalue the dollar, despite similar actions of China against the yuan. And although the American President put an end to long disputes regarding the possibility of such actions, the market ignored his words. Moreover – the euro/dollar pair started the trading week with small corrective growth, returning to the 12th figure. This reaction is since the traders in recent time of the minimum estimated the probability of this scenario. In early August, White House economic adviser Larry Kudlow, as well as US Treasury Secretary Steven Mnuchin denied such intentions, and Trump, in turn, only confirmed their commitment to the position.
But the further easing of the Fed's monetary policy parameters is still in the focus of market participants' attention, so the upcoming releases can cause increased volatility in the pair. However, Monday is empty in this context. Although the monthly budget execution report will be published today during the US session, it usually has little effect on the price dynamics of the pair.
While on Tuesday, the most important indicator will be released – the US consumer price index. Let me remind you that at its July meeting, the US regulator hinted at a possible rate cut in September or one of the meetings before the end of the year – noting that the Fed's decision will depend on the incoming data (first of all, we are talking about the state of the labor market and inflation). But then, the market ignored this remark, due to the recovery of many economic indicators. In particular, Nonfarm, retail sales, consumer confidence, average hourly wage growth, and the GDP – all of these indicators showed growth.
Such dynamics gave traders confidence that the Federal Reserve will limit itself to only one " precautionary" round of rate cuts. But the unexpected escalation of the trade war has exacerbated the general fundamental background, after which the probability of easing the Fed's monetary policy has increased again. Weak inflation will only increase concerns, putting pressure on the dollar. According to forecasts, the July consumer price index will show a positive trend – in monthly terms, it will grow to 0.3% (after a weak result of 0.1% in June), and in annual terms – to 1.7% (after a decline to 1.6%). In turn, the core index (excluding food and energy prices) should show a weaker result: +0.2% in m/m and 2.0% y/y. If the above figures come out worse than the forecast values, the dollar will again fall under the wave of sales.
During the European session on Tuesday, the final estimate of inflation growth in Germany for July will be published (according to forecasts, the final estimate will coincide with the initial one). Also, we find the index of sentiment in the business environment from the ZEW Institute in Germany and throughout the euro area. In both cases, a negative result is expected – the indicators will not only remain in the negative area but also update the multi-month lows.
On Wednesday, the EUR/USD pair will respond to Chinese data on industrial production (projected to fall from 6.3% to 6.0%), as well as data on the growth of the European economy – we learn the second estimate of GDP growth in the eurozone. According to general forecasts, the second estimate will coincide with the original (+0.2% q/q and +1.1% y/y). Also on Wednesday, preliminary data on the growth of the German economy will be published. According to experts, Germany's GDP in the second quarter will fall to a negative area (-0.1% q/q -0.3 y/y).
On Thursday, many European trading platforms will be closed – the Catholic world celebrates the assumption of the blessed virgin Mary. Nevertheless, during the American session on Thursday, releases of quite important data are expected. First of all, we are talking about the indicator of retail sales in the US. July data should repeat the June results, so this release will affect the dynamics of the pair only if it is worse or better forecasts. Also on Thursday, it is worth paying attention to the labor cost index – according to some analysts, this is one of the "favorite" Fed inflation indicators. In the first quarter of this year, it fell to the level of -1.6%, but in the second quarter, the indicator is expected to recover to 1.7%. This indicator allows us to estimate the rate of wage growth in the United States and, accordingly, is a good indicator of inflationary pressure in the country. Again, if he disappoints, the concern of investors about the reaction of members of the Federal Reserve will only increase.
In general, macroeconomic reports will only complement the fundamental picture of the EUR/USD pair. Investors will continue to focus on the trade conflict between the US and China. Today, the People's Bank of China lowered the exchange rate of the national currency again – along with the dollar, the yuan has already weakened to 7.066. This suggests that the confrontation continues, and the Chinese do not intend to conclude a deal on deliberately unfavorable terms, especially in the context of the rating victories of Democrat Joe Biden.
According to a poll conducted this weekend, the former Vice President of the United States in the struggle for the presidency would be ahead of the current president Donald Trump by eight percentage points. In light of these trends, Beijing will not rush to conclude a deal with Trump, which soon will only increase the pressure on China. This fact will harm the position of the US currency. However, the potential for corrective growth of the EUR/USD pair is limited due to the political crisis in Italy. The actual collapse of the coalition is fraught with early elections, the results of which may come to power more radical right-wing policies that will only exacerbate the conflict with Brussels. Thus, the euro/dollar pair is "under the crossfire" of fundamental problems – both on the part of the dollar and the euro. This fundamental picture assumes a wide-range flat in the range between 1.1155 (Tenkan-Sen line on the daily chart) and 1.1260 (the lower boundary of the Kumo cloud on the same timeframe).