FX.co ★ EUR/USD. Fed, ECB, US GDP, and Core PCE Index. Hottest week of July just ahead

The EUR/USD pair closed the previous trading week at 1.1126, reflecting the US dollar's strength. At the beginning of the week (July 18), EUR/USD buyers reached a nearly one-and-a-half-year price high at 1.1276. However, momentum shifted in favor of the bears, and the pair gradually fell, eventually declining by 150 pips.

Nevertheless, there is no talk of a trend reversal (yet). If we look at the weekly EUR/USD chart, we can observe a corrective movement after a strong 400-pip surge that we witnessed at the beginning of this month. Just three weeks ago, the pair was trading around 1.07-1.08, but after the US Consumer Price Index data, traders shifted the price range to 1.1130-1.1250. From a formal point of view, the pair has only moved towards the lower band of this price range. To pull off a trend reversal, EUR/USD bears need to return the pair to the 1.10 level and also consolidate below the 1.1030 target (the middle line of the Bollinger Bands indicator, which coincides with the Kijun-sen line on the 1D chart). If the price settles below 1.1030, the Ichimoku indicator will form a "Dead Cross" signal, with the Tenkan-sen and Kijun-sen lines on the daily chart positioned above the price and the Kumo cloud below it. In this case, you may go for short positions. But for now, the situation remains uncertain. Key events during the upcoming week will determine the price movement's direction in the medium term perspective.

Fed and ECB

The Federal Reserve and the European Central Bank will both announce crucial interest rate decisions this week (on July 26 and July 27, respectively). The formal outcomes of the July meetings are practically predetermined. According to the CME FedWatch tool, there is a 99.5% chance the new fed funds range after Wednesday's release will be 5.25% to 5.50%. This probability has not dropped below 70% in the past three weeks, even after the latest inflation report. The ECB is going through a similar situation. Back in June, after the previous meeting, ECB President Christine Lagarde announced a rate hike in July. In her subsequent speeches, she has not cast doubt on this scenario.

In other words, this is one of those cases where the formal outcomes of the meetings are pre-determined in advance, with an almost 100% likelihood of realization.

However, the focus shifts to the future prospects. For example, after the US inflation report, there have been more discussions about whether the central bank will perform the "final chord" in July. Most economists surveyed by Reuters (87 out of 106) stated that, in their opinion, the rate hike by the Fed in July could be the final step of its current tightening cycle. This view predominates in the market. If the US central bank does signal that the July decision will be the last in the cycle, the dollar will come under significant pressure. Despite the widespread discussion of this scenario, it is not the only one, especially in light of hawkish statements from some Fed officials. In particular, Christopher Waller and Mary Daly have called on their colleagues not to abandon the hawkish stance "as inflation has not been defeated yet" after the inflation report.

Regarding the ECB, the focus is also on the future prospects of monetary tightening. Over the past few weeks, Lagarde has changed her stance several times. During her speech at a forum in Sintra, she unexpectedly softened her wording, refraining from confirming any further steps towards monetary tightening after the July meeting. However, last Monday, the ECB president made more hawkish statements, noting that inflation in the eurozone is still above the 2% target level, and therefore the ECB has "a lot of work ahead."

By the way, this week the core Consumer Price Index (CPI) for June was revised upwards. According to the initial estimate, the core CPI rose by 5.4% last month, while the final estimate shows an increase of 5.5%. Given that the dynamics of core inflation has always been a particular concern for ECB officials, such a result may strengthen the hawkish sentiment of most ECB members.

Thus, there are certain prerequisites for the Fed not doing any favors for the dollar, while the ECB is turning into an "ally" of the euro, amid the slowdown in US inflation and the acceleration of core inflation in the eurozone. However, some Fed representatives have maintained a hawkish stance, so the "moderately hawkish" scenario should also not be ruled out.

US GDP and more

Key data on the growth of the US economy for the second quarter will be released on Thursday, July 27. As a reminder, in the first quarter, according to the final estimate, US GDP grew by 2.0%, while the initial estimate was 1.3%. In the second quarter, the US economy is expected to accelerate by 1.7%. A "red-colored" release will put pressure on the greenback, although in this case, traders' reaction will largely depend on the July Fed meeting, the results of which will be known a day before the report.

Overall, the economic calendar for the upcoming week is filled with events, in addition to the Fed and ECB meetings. For example, on Monday, PMI indices will be published, on Tuesday, we have the German IFO indices and the US consumer confidence indicator, on Wednesday, the volume of home sales in the primary US market, and on Thursday, the aforementioned GDP growth report and the volume of durable goods orders. And finally, on Friday, the core Personal Consumption Expenditures (PCE) index, which is a key inflation indicator for the Fed. According to the forecasts of most experts, in June, the indicator will slow down to 4.2% year-on-year (which will be the lowest value of the index since October 2021).

However, all these reports, despite their actual significance, will remain in the shadow of the central banks' meetings. By the end of the upcoming week, it will become clear whether the bulls can bring back the uptrend and reach the 1.13 level, or whether the bears will take the initiative, and push the price back to the 1.07-1.08 area.