The EUR/USD pair is confidently approaching the 1.1200 level last seen in March 2022, hitting new highs. So the current rise is quite extraordinary. Moreover, there are signs of a continued bullish run in the medium term. Everything will depend on the positions of the Federal Reserve and the European Central Bank.
At the moment, market sentiment is bullish as yesterday's inflation data cast doubt on any additional rate hikes after the July meeting. If Fed members adopt a cautious stance at their July meeting to be held at the end of this month and do not announce another step towards monetary policy tightening, the dollar will come under strong pressure. Moreover, the fact of the July decision has already been priced in by the market. The probability of delivering a 25-basis-point rate hike remains above 90%, despite a slowdown in US inflation. However, skepticism about the Fed's future steps has increased. For instance, the probability of keeping rates unchanged at the September meeting (in case of a hike in July) stands at 82%; at the November meeting - 79%; and at the December meeting - 65%.
In other words, market participants are certain that the Federal Reserve will deliver its last rate increase in July and then take a wait-and-see approach until the end of the year (at least until the end of autumn).
Yesterday's inflation report only reinforced confidence in such a scenario. Notably, the consumer price index increased by 0.2% in June from a month ago, below the expected rise of 0.3%. On an annual basis, the CPI slipped to 3.0% against the forecasted decline of 3.1% (in May, the indicator stood at 4.0%). The latest reading marks the slowest pace of inflation growth since March 2021. The core consumer price index, excluding food and energy prices, also fell short of forecasted values. The indicator reached 0.2% month-on-month (after a 0.4% increase in May) and 4.8% year-on-year, below the estimate of 5.0%.
These figures suggest that in July, the Federal Reserve will pause rate hikes or at least ponder over further monetary policy tightening.
According to currency strategists at Commerzbank, pressure for further rate increases has noticeably weakened following the release of the June inflation data. There are increasing signs that inflationary pressure in the United States is easing, experts noted. Against this backdrop, the July hike will probably be the last one, at least within the current year, Commerzbank analysts concluded.
Similar views were expressed by experts at ING. In their opinion, the dollar's current weakness is likely the start of a "long-awaited cyclical decline" due to a slowdown in US inflation. At the same time, analysts note that when discussing the prospects of monetary policy tightening, it is important to consider not only the peak value of the rate but also how long interest rates will remain at the achieved level. Speculation on rate cuts will put pressure on the dollar, especially if inflation continues to ease.
Interestingly, the US dollar index has already slipped to the area of 99.00, breaking through the psychologically important support level of 100.00. Major currency pairs have accordingly turned around, reacting to a sharp drop in the American currency.
By and large, it is now up to the European Central Bank. If the regulator maintains a hawkish stance and hints at further rate hikes beyond July, the EUR/USD pair will gain stronger upside momentum, driven not only by a weaker dollar but also by a stronger euro.
However, this fundamental factor will play a supporting role at best. The main driving force behind the EUR/USD pair's rally is the greenback, which is losing ground across the board.
From a technical point of view, the situation is as follows. According to longer time frames (except the weekly chart), the EUR/USD pair is either above the upper line or between the middle and upper lines of the Bollinger Bands indicator. Besides, it is above all the lines of the Ichimoku indicator, which provides us with a strong bullish signal on the weekly chart. This indicates that market sentiment is clearly bullish. The upside momentum is so strong that it is early to talk about a price correction. The nearest target for the pair's rally is the level of 1.1210, which coincides with the upper line of the Bollinger Bands indicator on the four-hour chart. The next target for buyers lies at the level of 1.1300. The pair's upside potential has not been exhausted yet, so it is worth using price pullbacks as an opportunity to open long positions.