The US currency is back on top. Today's report on the growth of inflation in the United States once again exceeded all expectations, being in the green zone. The thesis actively promoted by some members of the Federal Reserve that the growth of inflation indicators will be temporary is gradually losing its relevance, since inflation in the United States has been updating long-term records for the third consecutive month.
This week, the greenback has several tests, according to the results of which the currency will choose the vector of its movement. Even against the euro: EUR/USD traders have been trading in the range of 1.1780-1.1900 for almost two weeks (that is, since the end of June), waiting for a powerful information driver. One of these drivers is today's report, the impact of which is difficult to overestimate. The overall consumer price index jumped to 5.4% in June (year-on-year). The last time the indicator was at such heights was in the early 90s of the last century. On a monthly basis, the overall CPI also came out in the green zone: instead of the expected slowdown to 0.4%, the index rose to 0.9%. Core inflation showed a similar trend. The consumer price index, excluding food and energy prices, reached 4.5% in annual terms (also a long-term record), and 0.9% on a monthly basis (exceeding the forecast values). In other words, all the components of today's report were in the green zone, demonstrating significant growth for the third (!) consecutive month.
The second test will be the speech of Fed Chairman Jerome Powell. He will announce a semi-annual report to congressmen tomorrow and the day after tomorrow, simultaneously answering their questions.
It should be noted here that now any more or less significant release is considered by EUR/USD traders through the prism of the prospects for tightening monetary policy – either from the Fed or from the ECB. Therefore, a "formal" increase in inflation is not enough for a large-scale dollar rally: another "puzzle" is needed in the form of a hawkish reaction of the Fed. In general, most analysts believe that the Fed can start curtailing QE faster than the European Central Bank. They argue their position by the fact that inflationary pressure is much stronger in the United States (and today's report confirms this), so the ECB can afford to maintain an accommodative policy much longer than the US central bank. Representatives of the ECB mostly voice dovish stance, especially against the background of a slowdown in the growth of inflation in the eurozone (the general consumer price index came out at around 1.9%, the core index – at around 0.9%. Both indicators were in the red zone).
However, the hypothetical assumptions of analysts are one thing, but the hawkish hints of Powell are completely different. For example, Powell, who voiced quite dovish remarks in Congress at the end of June, acted as a kind of "stop-tap" for dollar bulls. It is for this reason that the greenback, paired with the euro, could not push for a downward trend and settle in the area of the 17th figure to indicate the priority of the downward movement. EUR/USD bulls, in turn, similarly failed to "catch the falling banner": if the pair grew within the above range, it was only due to the temporary weakening of the dollar or due to profit-taking by the bears.
In other words, the pair was stuck in the flat largely due to Powell, who offset the optimism of dollar bulls regarding the prospects for tightening the parameters of the Fed's monetary policy. Tomorrow, Powell can correct his "mistake". If the tone of his speech is hawkish (primarily regarding the prospects for QE), then the market will talk about the fact that the Fed will announce the curtailment of incentives at one of the next meetings – in September or October. For example, Goldman Sachs analysts said last week that, according to their estimates, the Fed will announce the curtailment of QE, if not in November, then in December, that is, at the final meeting this year. And the central bank will begin to sound the corresponding hints in the near future – in August (or at the Fed meeting, or at the economic symposium in Jackson Hole) or in September.
Thus, today's report provided significant support for the dollar, but Powell still has the last word. For this reason, EUR/USD bears were unable to settle in the area of the 17th figure: as soon as the pair reached the support level of 1.1780 (the lower line of the Bollinger Bands indicator on the daily chart), it attracted bulls.
At the moment, it is best to take a wait-and-see attitude on the pair: Powell may provoke increased volatility in all dollar pairs tomorrow, but whether this volatility will be in favor of the greenback or, conversely, is an open question.
