EUR/USD. This week's preview: US inflation and Powell's two-day speech to Congress

The EUR/USD pair continues to trade within the wide price range of 1.1780-1.1900, where it has been staying since June 30. The price is alternately pushed off from the borders of the range. During today's Asian session, the pair actually stood still – on the one hand, the upward impulse faded, but on the other hand, the EUR/USD bears could not take control. The price declined by only 30 points from the local high. Therefore, traders are waiting for information drivers that will help them break out of the cycle of a wide-range flat. It is worth noting that this week will be busy, so we can expect increased volatility in the coming days.

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However, the economic calendar for the EUR/USD pair is almost empty on Monday. The only thing interesting thing is the speech of the Fed representative, John Williams, who is the CEO of the Federal Reserve Bank of New York. Not so long ago, he said that he was not ready for the Fed to abandon the support it provides to the economy, amid uncertainty about the pace of recovery from the effects of the pandemic. According to him, the data and conditions have not improved enough for the regulator to abandon the monetary policy that provides for active support for the economic recovery. He is expected to voice such theses again today.

On Tuesday, the most important macroeconomic data of the current week will be published. We are talking about US inflation, which has been breaking records for the last two months. It can be recalled that the May consumer price index surged to 5% in annual terms. The last time the indicator was at such peak were in the summer of 2008 and back in 1991. Core inflation showed a similar trend. The consumer price index, excluding food and energy prices, reached the level of 3.8% in annual terms (also a long-term record), and the level of 0.7% (exceeding the forecast values) in monthly terms. In other words, all the components of the last release were released in the "green zone", showing significant growth for the second month in a row.

It should be noted that the US dollar has been driven into a kind of trap. Given investors' "hawkish" expectations, the US economy should keep the bar high, in line with the overestimated expectations of dollar bulls, experts and Fed members. Any deviation from the set pace will be interpreted against the US currency. Therefore, tomorrow's data should be released at least at the forecast level in order to prevent the national currency from weakening.

According to preliminary forecasts, the rate of inflation growth will slightly slow down: the general index should come out at 0.5% mom, 4.9% yoy (previous values of 0.6% mom, 5.0% yoy), and the core index at 0.4%, mom, 4.0% yoy (pre-0.5%, 3.8%). It can be seen that only the core inflation in annual terms can show a positive trend, while the other components should show a more modest result. The reaction of the US dollar will depend on the "unambiguity" of the release. If all the components do not reach the forecast levels, the US dollar will be under the strongest pressure, but if the publication comes out in the "green" zone, then it will open a second wind to dollar bulls.

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On Wednesday, Jerome Powell will begin his two-day speech in the US Congress. First, the Fed Chairman will present a semi-annual report on monetary policy to the House Financial Services Committee, and then to the Committee on Banking, Housing and Urban Affairs the next day. It is unlikely that the head of the Federal Reserve will purposefully voice "hawkish" rhetoric, supporting the US dollar. But at the same time, there is a risk that the market will interpret Powell's rhetoric in its own way, making appropriate "branched" conclusions. For example, if his tone of the speech is optimistic (primarily regarding the pace of recovery of the US economy in the second half of the year), then the market will discuss again the fact that the Fed will announce the curtailment of QE at one of the next meetings – in September or October. But at the same time, Powell may not even mention such a scenario in his speech.

However, we believe that the rhetoric of the head of the Central Bank will be predictable – in line with his recent speeches. When speaking to Congress during the second half of June, he said that the regulator intends to motivate and encourage a "broad and comprehensive" recovery of the labor market. At the same time, he assured Congress that the Federal Reserve will not raise interest rates "too quickly", focusing only on inflation indicators. During his speech, he repeated several times the thesis, the essence of which is reduced to a wait-and-see position. According to him, the Fed will not tighten the parameters of monetary policy only because of fear of inflation, since the growth of inflation indicators is temporary and is largely due to the low base of last year. It is noteworthy that Powell's speech this week will literally be held the day after the inflation release. It is obvious that this fact will also affect the tone of the rhetoric of the head of the US regulator.

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On Thursday, investors will focus on Chinese releases. In particular, China will publish data on economic growth in the second quarter of this year, as well as secondary data on the growth of the labor market in the US. The number of initial applications for unemployment benefits has been gradually but consistently falling (with small pullbacks) since April, reflecting positive trends. This week, the indicator should slightly decline – from 373 thousand to 350. Also on Thursday, the Fed-Philadelphia manufacturing index will be published, which, on the contrary, may disappoint dollar bulls. Based on the forecasts, the indicator should reach the level of 27 points – this is the weakest result since February 2021.

And finally, the publication of US retail sales on Friday will set the tone for trading. Judging by preliminary forecasts, this indicator will similarly not be in favor of the US dollar. The volume of retail trade fell by 1.3% in May, and a negative trend is also expected in June (-0.5%). During the European session on Friday, Europe will release its final data on the growth of inflation. However, this data will not have any impact on the pair, since the final estimates should coincide with the preliminary ones.

Therefore, the market is primarily waiting for two important events that will determine the vector of movement of the US currency. First, this is the release of data on the growth of American inflation, and second, the speech of Jerome Powell in Congress. All other fundamental factors will be of secondary importance.

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

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