The euro and the British pound are gradually recovering from their lows and preparing for another surge. However, this will only happen if the core consumer price index drops on a monthly basis. Some economists believe that the consumer price index, which excludes prices of food and energy, likely rose by 0.2% last month, following a similar increase in June.
If the data is significantly below the forecast, it will mean that the US economy is facing deflation. This would be relatively good for risk assets like the euro and the British pound. However, there are those who are sure that lower price pressure is not good, as it directly points to worsening economic conditions. The fact is that previous rate hikes by the Federal Reserve are affecting demand in sectors sensitive to interest rates. However, this could pose problems for the dollar and strengthen the euro and pound.
Today's report will also help set the tone for the Federal Reserve's stance in the coming weeks. Lately, many politicians believe that interest rates have peaked and that further tightening does not make sense. "Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work," Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, said.
Investors no longer expect the US central bank to continue raising interest rates, especially after they raised the key rate to its highest level in 22 years. If today's inflation data comes in below the forecasts, it could reinforce these expectations.
However, the focus is now more on core inflation. Economists suggest that a modest increase in rental prices and a slump in the prices of both used and new cars could significantly impact July's figures. Prices of core goods likely fell by 0.3%, partly due to a 1.6% decrease in used car prices and a 0.5% decrease in new car prices. Rental prices probably rose by 0.4% after a 0.5% increase in June.
While July's data might keep optimism alive, the data for August, due out next month, might not be as positive. Considering that rising oil and gasoline prices will drive up the overall consumer price index, policymakers will likely focus on the need for another rate hike. In any case, any sharp short-term drop in price pressure will positively affect the euro and the British pound and weaken the US dollar.
Regarding today's technical picture for EUR/USD, the pressure on the euro remains the same. To regain control, buyers should keep the price above 1.0960. This would pave the way to 1.1005. From there, the price may climb to 1.1040 and 1.1070. However, it would be quite difficult without support from major traders. If the pair drops, I expect significant action from major buyers only around 1.0960. If they fail to be active, it would be wise to wait for a low of 1.0915 or consider long positions from 1.0870.
Meanwhile, demand for the pound sterling is mounting. The pound sterling will rise only after bulls gain control over the 1.2735 level, which still needs to be reached. Regaining this range will boost hopes for a recovery to 1.2780, after which we can talk about a surge to around 1.2840. If the pair falls, bears will attempt to take control over 1.2740. If they succeed, a breakout of this range will hurt bulls' positions and push GBP/USD to a low of 1.2690, with the potential to drop further to 1.2650 and 1.2620.