US Dollar to Rebound

The EUR/USD continues to rise to multi-month highs, as investors speculate over what Mario Draghi recently said. The unease associated with the words "normalization of monetary policy", "reflation", "temporary nature of slowing inflation", is gradually taking place, which leads to the question of "what next?". In fact, the president of the ECB noted that inflationary forces are currently fragile, which requires the presence of accommodative monetary policy. The speech of Vitor Constancio has its own reason as the Vice-President of the European Central Bank did not see anything new in his leader's speech.

According to Mario Draghi, as the euro area's GDP recovers, monetary policy becomes more accommodative, and the ECB should gradually normalize it, in order to leave it at a level that reaches economic development. This certainly makes sense, however such remarks are enough to compel the market to follow orders to BUY or SELL. No one will wait for a long period of time. Something similar also happened to the EUR/USD.

It is clear that more solid foundations are needed to extend the rally: the support of the stock market, further improvement of macroeconomic data from the euro area and the gradual recovery of inflation. There are problems with the latter. According to forecasts of Bloomberg experts, both German and European CPI in June are seen to slow down, which will force the ECB to reconsider before they unwind the Quantitative Easing programme.

The dynamics of German and European inflation

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Source: Trading Economics.

At the same time, the Federal Reserve, in contrast, has more freedom to to decide as it sees fit. The S&P 500 moves near record highs, the yield of US Treasury bonds is increasing more slowly than its European, Canadian or British counterparts, and the dollar index has dropped to its lowest level since September. Furthermore, the market is often heard implying an end to the "bull" market of the US dollar. In such conditions, the Federal Reserve can afford to turn a blind eye to the slowdown of the PCE and hike its federal funds rate. Futures market are pricing in the chances of such an outcome with 18% in September and 57% by December. If the indicator falls back into growth, then the "bears" for EUR/USD will chose to attack.

Looking at the FOMC representatives' consideration towards stock market concerns, it appears that not only is raising rates possible but is also necessary. The words of Janet Yellen, Stanley Fischer and John Williams on securities that could become overvalued based on the perspective of some fundamental analysis, the excitement of investors, will push holders of shares to sell. In addition, the rise of yield on debt instruments is a "bearish" factor for the S&P 500.

Technically, the EUR/USD price ranges between 1,1345-1,1475. Breaching the resistance level raises the risks of reaching the target by 127.2% on the "Crab" pattern. On the contrary, a successful attack on support will lower the euro to $1,128-1295.

EUR/USD daily chart

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The material has been provided by InstaForex Company - www.instaforex.com