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- The exchange rate of the euro against the dollar (EURUSD) rose by a percentage, reaching its highest level in 16 months at the resistance level of 1.1140.
- This is after the release of US inflation data that reduces market expectations, and more gains are possible.
- Inflation numbers, along with the divergence of US job numbers, weakened expectations of raising US interest rates, which brought sharp losses to the US dollar against the rest of the other major currencies.
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The headline US inflation figure eased to 3.0% on an annual basis for the month of June, down from 4.0% in May, and sent a clear message to the markets that the US Federal Reserve was about to win its fight against inflation and thus the end of the rate hike cycle. in hand. “The US CPI report sent a jolt of lightning through the markets,” says Matthew Wheeler, analyst at FOREX.com.
Although core US inflation fell sharply, core inflation rose 4.8% year-on-year in June, which is still well above levels that match the Fed’s target of 2.0%. Therefore, it is likely that the US interest rate will be raised at least once later in July, although the prospects for a follow-up move in September have all but vanished due to the lower inflation data in July. An expression of this expectation was that lower US bond yields weighed on the US dollar, allowing EUR/USD a path to new multi-month highs.
Even with better-than-expected inflation data, the Fed considers it certain to raise its benchmark rate when it meets in two weeks. But with price increases slowing – or even falling outright – across a range of goods and services, many economists say they believe the Fed could delay what was expected to be another rate hike in September, if inflation continues to slow.
In markets on Wall Street, investors cheered the encouraging news, sending stock and bond prices soaring. Investors were eagerly anticipating the final end of the central bank’s interest rate hike. Overall, the US Federal Reserve has raised the benchmark interest rate by a significant 5 percentage points since March 2022, the fastest pace of increases in four decades. Its expected hike this month will follow the Central Bank’s decision to halt interest rate increases last month after 10 consecutive hikes.
According to the performance on the daily chart below, the direction of the EUR/USD currency pair changed to bullish. It was confirmed by breaching the resistance levels 1.1000 and 1.1120, respectively. The recent rebound gains pushed the technical indicators towards strong overbought levels. Today, the euro/dollar pair will stabilize around its recent gains until the rest of the US economic data results are announced, led by the producer price index, the next inflation reading, along with the number of weekly jobless claims.
On the other hand, the bears will regain control over the trend if the EUR/USD pair returns to the vicinity of the support level 1.0985 so far. It is determined to raise interest despite the decline in US inflation rates.
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