The EUR/USD pair is trading within the 1.0770-1.0850 range, alternately rebounding from the boundaries of the range. For instance, during the European trading session, the price reached the 1.0839 mark but then reversed and started to fall. By the start of the US session, the pair was already at the lower band of the range. Then, the buyers took the initiative. A similar situation occurred on Monday. Initially, the pair dropped to the 1.0766 mark and then rose to the 8th figure, ending the day at 1.0819.
Looking at the weekly chart, for six weeks, the pair has shown a clearly defined downtrend, dropping from the mark of 1.1276 (this year's high) to 1.0766 (a two-month low). This week, the downward movement has clearly stalled. Federal Reserve Chair Jerome Powell supported the greenback with his hawkish statements, but at the same time, he couldn't provoke a rally – again, due to some ambiguity from Powell. On one hand, he said that the central bank might need to further raise interest rates – "to cool still-too-high inflation." On the other hand, some experts were troubled by his tone as he sounded more cautious, meaning they have to weigh all the pros and cons when deciding on the rate. This created some uncertainty – at least in the context of the September meeting.
The majority of traders are confident that the Fed will maintain the status quo next month. According to data from the CME FedWatch Tool, the likelihood of a 25 bps rate hike in September is only 20%. Meanwhile, the probability of a 25-point rate hike at the next meeting in November has risen to 51% (a week earlier, the chances were estimated at about 25-30%).
In other words, despite the acceleration of some inflation indicators (Consumer Price Index, Producer Price index, and probably – the core PCE index) and hawkish signals from Powell, traders do not expect the Fed to tighten its monetary policy in September. However, there is growing confidence that a corresponding decision will be made in November. What does this indicate? Such an outcome reflects the mixed dynamics of inflation indicators. As mentioned earlier, the CPI for July unexpectedly increased, as did the PPI. But the core CPI showed a downtrend. The core PCE index for July remains a question. If, contrary to growth forecasts, it comes out below 4.1% year-on-year (or at this level), hawkish expectations will fall (both in the context of the September and November meetings). After all, in that case, the Personal Consumption Expenditure Price Index will show a consistent (and rather sharp) decline for the third consecutive month, indicating corresponding trends.
Indeed, Powell did not, in fact, announce a rate hike at one of the upcoming meetings; he merely admitted such a possibility, promising to "act carefully."
In my opinion, the Fed will keep the rate at its current level in September, even if the core PCE index emerges in the "green." Figuratively speaking, the central bank will extend the pause in September to observe inflation.
If the numbers for August (and September) also disappoint the Fed officials, we can prepare for a rate hike in November. Essentially, Powell has tied the fate of the interest rate to the dynamics of key macroeconomic indicators, primarily in the realm of inflation. The first "test" will take place on August 31, when we will learn the value of the core PCE index for July. If the indicator is in the green, the market is unlikely to drastically change its forecast estimates regarding the prospects of a rate hike in September. But the chances of monetary tightening in November will probably increase to 60-75%. Each subsequent inflation report in the green will "add" percentage points, strengthening the market's confidence in a rate hike at the November meeting.
For this reason, the core PCE index will undoubtedly provoke increased volatility in the EUR/USD pair (especially if it deviates from the projected growth estimate of up to 4.2%), but it will have a limited (short-term) impact.
On the other hand, the inflation report for the euro area, which will be released on the last day of August, could plunge the euro and, consequently, support the bears. According to forecasts, both the overall and the core CPI will show a downtrend. A deeper drop (relative to forecasts) will mount pressure on the euro, considering the disappointing PMI and IFO indexes, as well as the indecisive rhetoric of European Central Bank President Christine Lagarde at the Jackson Hole symposium. Unlike Powell, she did not hint at a possible rate hike in the near future. Lagarde limited herself to stating that rates will remain high "as long as necessary."
Thus, the market is on the verge of significant events. This week's key reports will be published on Thursday and Friday: the core PCE index, the inflation growth report in the eurozone, and the Non-farm Payrolls. Therefore, current price fluctuations should not be taken "seriously": the pair trades within the price range of 1.0770–1.0850, awaiting the main reports that will determine the price's direction in the medium term.