FX.co ★ US Treasury Secretary believes in victory over inflation

The euro attempted several times to reach a new yearly high following yesterday's statements by US Treasury Secretary Janet Yellen, but the pair faced a slight sell-off after the release of US retail sales data. However, the data, despite weak figures, merely served as a reason for a market turnaround.

During her speech, the head of the Treasury mentioned that labor market cooling plays a key role in slowing inflation in the US among other deflationary pressures. "The intensity of hiring demands on the part of firms has subsided," Yellen said in an interview on Tuesday. "The labor market's cooling without there being any real distress associated with it," Yellen added.

Besides labor market changes, Yellen listed housing costs and car prices among the factors that are likely to continue reducing price pressures. She also suggested that the size of American corporate profits might play a role. However, she cautioned against excessive optimism solely based on consumer price data for June.

Notably, the improvement in inflation brought relief not only to the Federal Reserve but also to Yellen and the Biden administration, making it easier for them to boast about overcoming inflation in the pre-election race. Yellen and other high-ranking officials had previously stated that the price surge caused by the pandemic would be temporary, but the Treasury Secretary later admitted her forecast was mistaken.

The decrease in inflation, announced last week, led economists and investors to reconsider the likelihood of a recession. Goldman Sachs Group Inc. lowered its estimate of an economic downturn to 20% from 25% earlier this week. JPMorgan Chase & Co., which turned bearish in the markets in December last year, stated that a soft landing is now more realistic than before.

As mentioned earlier, the report on the Consumer Price Index last week showed a 3% year-on-year increase, the lowest since March 2021. This is significantly lower than the peak of 9% recorded in June last year. Excluding food and energy, the core Consumer Price Index increased by 4.8% compared to the previous year.

In her interview, Yellen warned against excessive euphoria over the June data, calling them "one month's numbers."

Regarding the EUR/USD pair, bulls should push the price higher above 1.1250 and settle it there. This would allow them to reach 1.1275 and 1.1310. From that level, it might be possible to reach 1.1350, but without strong eurozone statistics, it could be challenging. In case of a decline, significant actions from major buyers are expected near 1.1210. If no significant support is found there, it would be reasonable to wait for a new low at 1.1170 or open long positions from 1.1130.

As for the GBP/USD pair, demand for the pound is quickly decreasing. Expectations for a rise in the pair can be considered after gaining control above 1.3000, as a breakthrough in this range will strengthen hopes for a further recovery towards 1.3050, and even a sharper upward movement to 1.3100. In case of a decline, bears will attempt to take control at 1.2940. If they succeed, breaking this range will hit bullish positions and push the pound/dollar pair to the lows of 1.2905 and 1.2845.