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Heading Down: Powell failed to deploy the EUR/USD pair

The euro-dollar pair is testing the 17th figure again, indicating the priority of the downward movement. Despite all the"efforts" of Jerome Powell, who voiced dovish rhetoric in Congress, the greenback not only stayed afloat, but also showed character, strengthening its positions throughout the market today.

The immediate reason for the downward impulse of EUR/USD was the release of data on the volume of retail sales in the United States. The published figures came out in the "green zone", significantly exceeding the forecast values. Thus, the total volume of retail trade in June increased by 0.6% MoM, while experts predicted its reduction by 0.4%. Excluding car sales, the indicator showed a stronger result, rising by 1.3% (with a growth forecast of only 0.4%).

This release continued a series of positive macroeconomic reports from the United States. US inflation has been showing record growth for the past three months, and Nonfarm Payrolls reflect the recovery of the labor market (let me remind you that 850,000 jobs were created in June). The greenback was supported by other equally important macroeconomic indicators – in particular, data on the spending and income of Americans. The indicators came out mostly at the forecasts level. The main index of personal consumption expenditures (Core PCE Price Index) rose to 0.5% MoM and accelerated to 3.4% YoY (the best result since February last year).

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Such dynamics speak not only about the recovery of the American economy – the market is increasingly suggesting that the Federal Reserve will decide to tighten the parameters of monetary policy ahead of the previously announced deadlines. Abstracting from intraday price fluctuations, it can be noted that the main support for the dollar is provided by the "hawkish" expectations of investors. This is especially evident in the euro-dollar pair. The uncorrelation of the positions of the ECB and the Fed is becoming more pronounced – and this fact serves (and will continue to serve) as the main anchor for the EUR/USD pair.

Following the results of the June meeting, the US Federal Reserve significantly tightened its rhetoric, supporting the US currency. At the same time, most representatives of the European Central Bank continue to voice "dovish" rhetoric – both in the context of the prospects for QE and in the context of the prospects for an interest rate increase. Recall that the European Central Bank recently announced a review of its monetary policy. According to the new strategy, the target level was set strictly at the 2% mark. At the same time, the European Central Bank pointed to the possibility of a "transition period", during which inflation may moderately exceed the target indicator. That is, under certain conditions, it may exceed the 2% target, and this fact will not entail the adoption of immediate response measures.

Unlike US inflation, which updates multi-year records on a monthly basis, European inflation has slowed its growth. Just today, the final data on the growth of the consumer price index in the eurozone were published. The final assessment coincided with the preliminary one: in June, both the general index slowed down (reaching 1.9% after the May growth to 2%) and the core index (which turned out to be at 0.9% after the previous growth to 1%). Therefore, in the foreseeable future – at least within the current year – the European Central Bank is unlikely to decide to curtail incentives. As for the interest rate, according to most analysts, the ECB will raise it no earlier than the second half of 2024.

Such prospects put background pressure on the euro, especially when paired with the dollar, which is "holding its own" thanks to the hawkish expectations of investors. Despite the pessimistic remarks of Jerome Powell, the market is still confident that the increasing price pressure will force the Fed members to take retaliatory measures. For example, Goldman Sachs analysts are confident that, according to their estimates, the Federal Reserve will announce the tapering of QE, if not in November, then in December, that is, at the last meeting this year.

During his speech in Congress this week, Federal Reserve Chairman Jerome Powell, by and large repeated the same theses that he voiced before congressmen at the end of last month. Their essence boils down to the temporary growth of inflation indicators, the US economy still needs incentives, and the US labor market is "is still far from perfect". Therefore, in his opinion, there is no need to hurry with the completion of QE and an increase in the interest rate.

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But this position goes against the comments of some hawkish Fed representatives. For example, Bullard called for tapering QE by the end of this year and raising the interest rate next year. The head of the St. Louis Federal Reserve was concerned, in particular, about the inflating of the "bubble" in the housing market. In addition, Robert Kaplan said about the "danger of too slow action", and the head of the Federal Reserve Bank of Cleveland, Loretta Mester, suggested that "low rates can lead to excessive price increases."

In other words, even if the Federal Reserve does not decide to taper QE this year, the very fact of a split in the country of the Fed will provide significant support to the US currency (especially if inflation does not slow down). The European currency, in turn, has to be content with cautious or "dovish" statements from the ECB members.

Thus, any more or less large-scale corrective increase in the EUR/USD price can be used to open short positions by the middle of the 17th figure. From the technical point of view, the pair is located between the middle and lower lines of the Bollinger Bands indicator on the daily chart, as well as under all the lines of the Ichimoku indicator, which indicates the priority of the downward movement. The main support level (the target of the downward movement) is the 1.1750 mark – this is the lower line of the Bollinger Bands on the daily chart.

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