The euro froze in place as if afraid of its own speed. Its surge in response to the slowdown in U.S. employment to 209,000 in June appears excessive. While the actual data turned out worse than Bloomberg experts' forecasts, the figure is quite respectable by historical standards. If the labor market is cooling down, it's not in the way the Federal Reserve (Fed) would like. Therefore, it is too early to talk about the federal funds rate rising to a maximum of 5.5%.
This could happen if the U.S. core inflation slows to less than 5%. Societe Generale believes that, in such a scenario, rumors may circulate in the Forex market that the Federal Reserve's June pause will extend into July. And from there, discussions about the end of the monetary tightening cycle may not be far off. This is bad news for the "bears" on EUR/USD. The French bank forecasts an increase in the pair above 1.1, with subsequent consolidation above that level.
In reality, low inflation cannot exist in a hot economy. Nor can there be a weak currency. When the leading indicator from the Federal Reserve Bank of Atlanta signals that U.S. GDP will expand by more than 2% in the third quarter, the economic surprise index rises rapidly along with the yield on Treasury bonds. It is unexpected to witness a weakening of the U.S. dollar.
U.S. Economic Surprise Index Dynamics
Perhaps it has to do with the eurozone? The German manufacturing orders index pleased EUR/USD fans. However, the sole good news may turn out to be market noise. Especially since investor sentiment in Germany, according to the ZEW Institute, risks falling even further, which would be evidence of an imminent deep recession in the German economy.
European Central Bank (ECB) hawks are not as frightening as before. Their rhetoric has largely been factored into the quotes of the main currency pair. Moreover, the statement by Vice President Luis de Guindos suggests a division within the Governing Council. The influential official claims that the central bank will make decisions based on data, while many indicators point to a decline in inflationary pressure. This can be believed, as the eurozone economy appears weaker than the U.S. economy.
European Inflation Dynamics
In my opinion, it's time to stop focusing on inflation in an attempt to find answers to all questions. Investors have been doing this for a very long time and very closely. It's time to pay attention to economic growth. And in this regard, the U.S. is ready to outperform the currency bloc.
In my view, the rise of EUR/USD is the result of expectations of a slowdown in U.S. consumer prices to 3.1% and core inflation to 5%. Investors began factoring Bloomberg experts' forecasts into the currency pair's quotes. Against this backdrop, the euro may rise further, but it is unlikely to have enough strength to restore the upward trend.
Technically, on the daily chart, the inability of the EUR/USD pair to break above the pivot levels at 1.0975 and 1.101 may lead to the formation of the Broadening Wedge pattern. Sell the euro on rallies against the U.S. dollar.