12.07.202411:29 Forex Analysis & Reviews: US inflation becomes the main cause of the dollar's decline

According to yesterday's report, inflation in the US slowed to its lowest level since 2021 in June, prompting discussions that the Federal Reserve might soon lower interest rates. The core Consumer Price Index (CPI), which excludes food and energy costs, rose by just 0.1% compared to May, marking the weakest growth in three years. The overall index even fell by 0.1% for the first time since the start of the coronavirus pandemic.

It's worth recalling that Federal Reserve Chairman Jerome Powell highlighted progress in reducing prices earlier this week after an unexpected surge in the first quarter. Yesterday's data will significantly help Powell and his colleagues gain the confidence needed to lower rates. Market participants are now betting on September as the month when rates will be lowered for the first time since their initial hike two years ago. Policymakers will have an opportunity to signal this at the July meeting, especially considering that unemployment has been rising for three consecutive months.

Powell, speaking to lawmakers this week, avoided discussing the timing of a possible rate cut and insisted that policy actions would be determined by incoming data. The next speech by the Fed chairman is scheduled for Monday in a moderated discussion organized by the Economic Club of Washington. We will see what comments he makes regarding yesterday's data.

Following the CPI report, Treasury bonds rose as traders almost fully priced in rate cuts for September and December. They also increased the likelihood of a cut in November—a move that would occur immediately after the US presidential election.

The report was also encouraging for President Joe Biden, especially amid calls from fellow Democrats for him to forgo running for re-election.

As I mentioned earlier, a positive contribution to the report came from housing prices, which rose by only 0.2%, the lowest growth since August 2021. Equivalent rent increased by 0.3%, the lowest figure in three years. In addition to slower rent growth, expenses for services and airfare, hotel accommodations, and inpatient hospital care also decreased compared to the previous month.

Thus, the June CPI report is a step better than the good May report, which should increase the FOMC's confidence in the inflation trajectory and achieve its targets. This should also lay a solid foundation for the Fed to begin lowering rates in September, causing the dollar to drop significantly against risky assets.

As for the current technical picture of EUR/USD, buyers need to focus on taking the 1.0875 level. Only this will allow targeting a test of 1.0900. From there, it could move up to 1.0940, but achieving this without support from major players will be quite challenging. The ultimate target will be a maximum of 1.0960. In the event of a decline in the trading instrument, I expect significant actions from major buyers only around the 1.0845 area. If there is no activity there, it would be good to wait for the minimum of 1.0815 to be updated or open long positions from 1.0785.

Regarding the current technical picture of GBP/USD, pound buyers need to take the nearest resistance at 1.2945. Only this will allow targeting 1.2990, above which breaking through will be quite challenging. The ultimate target will be the 1.3030 area, after which we can talk about a sharper jump in the pound to 1.3070. In case the pair falls, the bears will try to take control of 1.2900. If they succeed, breaking this range will deal a serious blow to the bulls' positions and push GBPUSD to a minimum of 1.2870 with the prospect of reaching 1.2840.