19.07.202317:37 Forex Analysis & Reviews: EUR/USD: Continuation of rally not guaranteed

An attempt by the bears on EUR/USD to counterattack was halted by the release of June European inflation data. The final reading showed that consumer prices corresponded to the flash estimate of 5.5%, while the core indicator exceeded it and also reached 5.5%. While CPI has significantly dropped from its October peak of 10.6%, core inflation remains near multi-year highs, indicating unfinished work for the ECB.

Dynamics of European inflation and ECB rate

Meanwhile, Bloomberg insiders claim that the Governing Council's biggest concern is regarding communications. ECB policymakers are considering the wording following the July meeting. The main task is to avoid sending clear signals about a deposit rate hike or its maintenance at the current level in September. The European Central Bank has refrained from commenting on this matter, but if a hawk like Klaas Knot states that monetary policy tightening in early autumn is not guaranteed, there must be some truth to it.

Meanwhile, investors continue to digest the information about the 0.6% increase in core retail sales in the U.S. in June. The resilience of the American economy can underpin the stability of the dollar. Moreover, according to Danske Bank, markets will shift their focus from monetary policy divergence to economic growth divergence in the near future. In other words, the reasons behind the July rally of EUR/USD were prompted by inflation slowdown-induced strengthening of pro-cyclical currencies and an increase in global risk appetite. These factors are already priced into the quotes of the major currency pair, and positive U.S. GDP dynamics will push the euro down to $1.06 and $1.03 in 6 and 12 months, respectively.

Dynamics of retail sales in the USA

Such a forecast seems like an attempt to put on a brave face in a bad game. The sharp deceleration of U.S. inflation and reduced recession risks in the U.S., are good news for the global economy. Simultaneously, China will experience accelerated growth, which will have a positive impact on the Eurozone. As a result, pro-cyclical currencies dependent on global GDP dynamics will be favored. The upward trend in EUR/USD remains intact. The main question for today is whether there will be a correction.

In its favor, there is the overly rapid rally of the major currency pair, the strength of the American economy and the weakness of the European economy, as well as the absence of pronounced monetary policy divergence between the Fed and the ECB. It is still unclear how much further the federal funds rate and the deposit rate will rise—25 or 50 bps? Both cycles of monetary policy tightening may end in July.

Technically, the inability of EUR/USD bears to play out the pin bar on the first attempt speaks of their weakness, or the strength of the bulls. However, a retest of support at 1.12 can occur at any time, and it will serve as a selling opportunity. On the other hand, there are plenty of buyers near the pivot levels of 1.1175 and 1.1145.