In light of upbeat data, a recession in the United States is unlikely. With slowing inflation, the Federal Reserve has more room for action, which reduces hawkish sentiments.

The University of Michigan Consumer Confidence Index rose to 72.6 from 64.4 in July, marking the highest rate in nearly two years. All components of the index significantly improved, and inflation expectations for the next year also increased to 3.4% from 3.3%. Most consumers see their incomes grow or at least keep pace with inflation.

Market sentiment also improved, supported by the stock market as JPMorgan, Wells Fargo, and Citigroup reported good earnings for the second quarter, with all three banks raising their net income forecasts.

The CFTC report logged a drop in the short position on USD for the second consecutive week. However, it was a small decrease, with a net short position coming in at -12.5 billion, slightly lower than the May lows.

Forecasts for the Federal Reserve's interest rate remained almost unchanged, with the market convinced of a quarter-point increase at the end of July, which is likely to be the last rate hike. The beginning of a rate-cut cycle by the American regulator is anticipated in March 2024, earlier than by the Bank of England and the ECB. Expectations for yield spreads largely explain the dollar's weakness.

EUR/USD

A slowdown in inflation in the United States has triggered an increase in demand for the euro as yield spread forecasts between the two most traded global currencies have shifted towards Europe.

The minutes of the ECB's June meeting revealed the possibility of another rate hike this month and at least one more in September due to a consistently high level of core inflation. The minutes also reflected strong signs of concern about rapid rate cuts. The tone of the report is clearly hawkish and will provide medium-term support for the euro.

The macro calendar is relatively empty this week, with the final data on eurozone inflation for June due on Wednesday. It is anticipated that core inflation will accelerate to 5.4%, making a rate hike by the ECB almost inevitable.

The net long position on EUR has slightly decreased by 136 million to 19.288 billion. The positioning has remained confidently bullish. A decrease in the long position, which started at the end of May, has halted. There have been no capital outflows into the dollar. The reference price is once again attempting to go up.

EUR/USD has broken above the swing high of 1.1012, and it is likely that momentum has not ended yet.

GBP/USD

On Wednesday, the UK will see the release of its consumer inflation report. Core inflation is forecast to remain at 7.1%, which is significantly higher than in the US. Inflation expectations remain high, as indicated by the labor market report, which showed a 7.3% increase in average weekly earnings excluding bonuses for the three months prior to May, the highest since the COVID-19 pandemic.

Taking into account that the unemployment-to-vacancies ratio remains low, the labor market remains tight, suggesting that we will not see a slowdown in wage growth in the near future. Therefore, we will hardly see a significant decrease in inflation.

There are risks of a recession in the UK. However, the latest data revealed a decline of only 0.1% in GDP in May, which missed economists' expectations of 0.3%. This indicates that the economy is managing the declining demand caused by increased borrowing costs.

The net long position on GBP has increased by 699 million to 4.693 billion. The positioning remains confidently bullish. The reference price is not in an uptrend primarily because UK bond yields have not reacted to the increased likelihood of more rate hikes by the Bank of England yet, thus keeping the yield spread stable. This stability may be a sign that the pound's growth is limited.

In the previous review, we speculated that bullish momentum was about to end and that GBP quotes were about to enter a sideways range. However, in light of the latest data, the bullish sentiment has strengthened. Nevertheless, due to limited fundamental factors, the rally of the pound may continue until encountering strong technical resistance at 1.3400/20, where it will peak and reverse. A retracement to the trendline at 1.2680/2700 seems more likely. Anyway, the publication of inflation data on Wednesday will be the determining factor.