Does the slowdown in CPI mark the beginning of a sustained disinflationary trend, or is it merely temporary? Judging by developments in the Middle East, investors appear to favor the latter scenario. If so, the EUR/USD rally may not last long. Let’s take a closer look and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- US inflation is expected to slow.
- The conflict in the Middle East continues to escalate.
- The US dollar is likely to regain ground.
- A failed test of 1.1565 could provide a reason to sell the EUR/USD.
Daily Fundamental Forecast for Dollar
If the US dollar managed to bounce back after being knocked down by July’s weak jobs report, why wouldn’t it do the same after a slowdown in US inflation? The EUR/USD pair has been retreating for the third consecutive day after hitting a three-week high following the US labor market data. Investors are bracing for the crucial CPI release while keeping a close eye on developments in the Middle East.
US Inflation
Source: Bloomberg.
Bloomberg analysts have good reason to expect a slowdown in consumer price growth. Labor costs are rising more slowly than labor productivity, while the impact of tariffs is fading. Oil prices are also lower than they were in May, which may have marked the peak in CPI growth.
Nevertheless, the escalation of the conflict in the Middle East suggests that the slowdown in inflation could be temporary. The odds of the Fed tightening monetary policy in September have returned to roughly 50%, even though, following the release of the US labor market data, investors had come to expect rates to remain unchanged at the upcoming FOMC meeting.
The same trend is evident in the bond market. After Treasury yields fell following the decline in July employment, they have resumed their upward trajectory. Combined with the increased likelihood of Fed tightening, this is putting pressure on EUR/USD quotes.
Investors doubt that the US shift from airstrikes to an economic blockade of Iran will produce the desired results. Tehran has lived under sanctions for years and may be able to hold out until the midterm elections. The stakes include control of the Strait of Hormuz and the freedom to continue its nuclear program. With so much at stake, Iran is likely to continue testing Donald Trump’s patience by targeting tankers and infrastructure in the Persian Gulf states.
A slowdown in US consumer price growth should be positive for the EUR/USD, partly because it could support further gains in stock markets. However, the stock market itself is becoming a source of inflationary pressure. Strong corporate earnings point to resilient demand, partly driven by the wealth effect. As a result, a significant divergence is emerging between the global MSCI index and a basket of inflation-sensitive securities.
MSCI and Basket of Inflation-Sensitive Stocks
Source: Bloomberg.
If the stock market is a source of inflationary pressure, it will prompt the Fed to tighten monetary policy. If investors perceive this to be the case, the S&P 500 will undergo a correction, which will strengthen the US dollar.
Daily Trading Plan for EUR/USD
The inflation data is unlikely to provide the EUR/USD with a clear direction. A slowdown in CPI would support buying the pair, but a failure to hold above 1.1565 could trigger a reversal and renewed selling pressure. The picture would be different if consumer price growth accelerates. In that case, it would make sense to add to short positions opened at the upper boundary of the 1.15–1.1565 consolidation range.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
