Both the euro and the pound sterling have skyrocketed to one-year highs after it became known that US inflation sharply slowed down last month, giving new hope that the Federal Reserve will soon be able to end the most aggressive monetary tightening in decades. Such prospects are bearish for the US dollar.
According to the report, the consumer price index rose only by 3% last month from a year ago. The CPI edged up by 0.2% in June on month. All this turned out to be much lower than economists' forecasts. The core CPI, excluding food and energy prices, grew by 0.2% from the previous month. In annual terms, prices increased by only 4.8%, the lowest rate since the end of 2021.
Despite all this, the figures are still well above the Fed's target level. Against this backdrop, Treasury yields plummeted, stocks went up, and the US dollar fell against the euro and the British pound. Chances of another Fed rate hike after the July meeting have dropped sharply below 50%.
As noted in the report, a key reason for the overall slowdown is that the latest data is compared to June 2022, when soaring energy prices pushed inflation up to a four-decade high. Today, investors will get to know producer prices, so let's see what changes await us there. The report also highlights the progress in bringing down inflationary pressure. These dynamics for us as traders are much more important than the indicators themselves, as we make decisions based on them. But, as I noted above, price pressure is still well above the Fed's target. This will assure Fed's policymakers to go ahead raising interest rates at the meeting on July 25-26.
Now officials have all the data at their disposal, from retail sales and the labor market to headline and core consumer price index. Producer price data will also be released today. On the basis of this data, I will build my forecast regarding the future of monetary policy. Importantly, the forecast will most likely be revised not in favor of the US dollar.
The report also showed that the key services category, excluding housing and energy, which Fed officials closely monitor when assessing inflation's path, changed little in June from the previous month. Compared to last year, the CPI slowed to 4%, which is also the smallest increase since the end of 2021. While energy prices rose, including gasoline and electricity, used cars fell in price for the first time in three months. Housing spending, which is the largest component of services and accounts for about a third of the overall consumer price index, rose by 0.4%. Fed officials are also worried about commodity prices, which were a disinflationary factor last year but have shown signs of strengthening in recent months. With the exception of food and energy, commodity prices fell for the first time in 2023.
In any case, waning inflationary pressure is clearly boosting the demand for risky assets, as the likelihood of a softer approach from the Federal Reserve intersects with the hawkish policies of the European Central Bank and the Bank of England, bringing an advantage to the euro and the British pound.
As for the technical picture of EUR/USD, if the buyers want to maintain control, they need to climb above 1.1175 and consolidate there. This will allow getting out to 1.1230. Already from this level, it is possible to climb to 1.1270, but it will be quite problematic to do it without strong statistics on the eurozone. In case the trading instrument goes down, I expect some serious actions on the part of large buyers only in the area of 1.1130. If no one is there, it would be a good idea to wait for the 1.1090 low to add more long positions or go long from 1.1060.
Let's discuss the technical picture of GBP/USD. The demand for the pound remains quite strong, which indicates that the bull market is underway. We will be able to bet on GBP's growth after the bulls take control over 1.3040 as the break of this level will reinforce hopes for a further recovery to the area of 1.3070, after which it will be possible to talk about a sharper upward move of the pound to the area of 1.3100. If GBP/USD falls, the bears will try to take control over 1.2990. If they succeed, a break of this range would hurt the bulls' positions and push GBP/USD down to a low of 1.2945. A lower fall to 1.2900 will follow.