29.07.202407:58 Forex Analysis & Reviews: EUR/USD. July Fed meeting, Eurozone inflation, ISM Manufacturing Index, Non-Farm Payrolls

So, ladies and gentlemen, please take your seats and fasten your seatbelts: we are entering a zone of high turbulence. The upcoming week is full of crucial fundamental events: the Federal Reserve meeting, the release of key US labor market data, the Eurozone inflation report, second quarter GDP data for the Eurozone, the ISM Manufacturing Index, and the US consumer confidence indicator.

All these fundamental factors will certainly trigger high volatility in the EUR/USD pair. By the end of the week, the EUR/USD pair will make a decisive move: it will either fall to the 1.07 area or return to the 1.0950-1.1000 range with the prospect of testing the 1.10 area.

Dollar

The most important event of the week for EUR/USD traders is the Fed meeting, the results of which will be announced on July 31. On one hand, the formal outcomes of the July meeting are predetermined: the market is 100% certain that the central bank will keep all monetary policy parameters unchanged. On the other hand, this will not be a routine meeting, as it will essentially determine the fate of a potential rate cut in September. Markets are currently pricing an 88% chance of a cut of at least 25 basis points by September, according to CME's FedWatch Tool. Any doubts about this scenario will provide strong support for the greenback, given the strong dovish sentiment in the market. However, even if the Fed approves a rate cut in September, it may still support the greenback by casting doubt on another rate cut in November or December. Here, traders' dovish expectations are also relatively high, with a 50/50 chance of a second rate cut in 2024.

The intrigue regarding the July meeting results remains, as important economic reports were published during the "quiet period." These reports reflect growth in the US economy for the second quarter (2.8% vs. a forecast of 2.0%) and a slowdown in the decline of the core PCE index (remaining at 2.6% in June, against a forecast drop to 2.5%). How the Fed members react to these reports is still an open question.

However, the market will not be driven solely by the Fed in the upcoming week. The dollar will also react to Nonfarm Payrolls, the ISM Manufacturing Index, and the Consumer Confidence Index. Meanwhile, the euro will respond to the Eurozone inflation report and the GDP data.

Ahead of the Nonfarm Payrolls data, there will be two reports that could shape traders' expectations. On Tuesday, July 30, we will learn the number of job openings at the end of June (JOLTs Job Openings), and the next day, July 31, the ADP report will be released. According to forecasts, the JOLTs data should show 8.05 million job openings (slightly less than in May but more than in April), and the ADP report should reflect a modest increase of 160,000 in private-sector employment.

Nonfarm Payrolls will traditionally be published on Friday, August 2. According to most experts, the unemployment rate in July will remain at the June level of 4.1%. The number of nonfarm payroll jobs should increase by 177,000 (a relatively weak result), and the average hourly earnings growth rate is expected to slow to 3.8%. If the data meets the forecast (let alone falls into the "red"), the likelihood of a Fed rate cut in September will rise again, as will the possibility of another cut in November or December.

The greenback will also respond to the dynamics of the ISM Manufacturing Index, the July value of which will be released on Thursday, August 1. A month ago, this key indicator unexpectedly fell into the contraction zone (dropping to 49.5 from a forecasted increase of 51.7). According to forecasts, the index will remain in the contraction zone in July but will rise to 49.0. The US dollar will receive significant support only if the indicator exceeds the target of 50.0 again.

Euro

The key release for the euro will be published on Wednesday, July 31. On this day, we will learn the preliminary data on Eurozone inflation for July. According to forecasts, this report is not expected to provide support to single currency. Both the overall Consumer Price Index (expected to decrease to 2.4% from the previous 2.5%) and the core index (expected to decrease to 2.8% from the previous 2.9%) are expected to show a downward trend.

A day before this release, on Tuesday, July 30, data on the Eurozone GDP for the second quarter will be published. The quarterly figure is expected to show a growth of 0.2% (after a growth of 0.3% in the first quarter), and the annual figure is expected to show a growth of 0.6% (after a growth of 0.4%).

If both reports (inflation and GDP) fall into the "red," the likelihood of the European Central Bank lowering interest rates in September will significantly increase, especially against the backdrop of disappointing PMI indices published last week. Conversely, "green" releases will maintain the suspense regarding the potential outcomes of the September meeting, especially since ECB President Christine Lagarde refrained from announcing a rate cut at the beginning of autumn, tying the central bank's decision to the dynamics of key macroeconomic indicators.

Conclusions

The dollar might receive support if the Fed is not dovish enough for the market. This would occur if the central bank does not guarantee a rate cut in September and/or questions the second rate cut within the current year. Macroeconomic reports could provide additional support for the greenback if the ISM Manufacturing Index and Nonfarm Payrolls exceed forecasted values.

Regardless, I believe the euro will continue to play the role of a "follower" in the EUR/USD pair. Even if inflation in the Eurozone accelerates contrary to forecasts and the European economy grows stronger than expected, the single currency will only receive temporary support; the dollar will be the dominant force in the pair.

From a technical perspective, the EUR/USD pair is on the middle line of the Bollinger Bands indicator on the daily chart and almost above all the lines of the Ichimoku indicator. If buyers overcome the resistance level at 1.0890 (the Tenkan-sen line on D1), Ichimoku will form a bullish "Parade of Lines" signal. The nearest target for the upward movement is the 1.0950 mark (the upper Bollinger Bands line on the same timeframe), with the main target being 1.1000. To develop the bearish scenario, EUR/USD sellers must settle below the support level of 1.0830 (the lower Bollinger Bands line on the 4-hour chart). The target for the downward movement is 1.0740, which corresponds to the lower Bollinger Bands line on D1.