EUR/USD - 1.0181 Despite euro's erratic fall from last Thurday's 2-week high of 1.0278 to retrace rise from July's 20-year bottom at 0.9953 to 1.0097 in post-FOMC, subsequent rally on broad-based usd's weakness due to less hawkish comments by Fed's Powell suggests pullback possibly over, above 1.0257 would yield stronger gain to 1.0295/00. On the downside, only below 1.0150/55 would risk another fall towards 1.0097. Data to be released on Thursday: Australia retail sales, export prices, import prices. France producer prices, Italy industrial sales, trade balance, EU business climate, economic sentiment, industrial sentiment, services sentiment, consumer sentiment, Germany CPI. US GDP, PCE prices, initial jobless claims, continuing jobless claims, KC Fed manufacturing and Canada average weekly earnings.  

The US economy is expected to have grown a modest 0.4% in the second quarter. A second consecutive negative reading will indicate the US is in a recession. USD strength or weakness will be directly linked to the market sentiment. The US will publish the preliminary estimate of the second quarter Gross Domestic Product on Thursday, July 28. The economy is expected to have grown at an annualized pace of 0.4%, improving from a 1.6% decline in Q1. Macroeconomic data, however, points to heightened downward risks for the economy, particularly figures linked to the last half of the quarter, as spending retreated sharply. A negative figure will mean the US is in a technical recession, defined as two consecutive quarters with negative GDP readings. Following the first year of the pandemic, global economies bloomed. The US expanded substantially throughout 2021 but lost momentum by the end of the year. Supply-chain issues and bottlenecks were initially blamed for the slowdown, alongside shocking spending that led to higher inflation. Central bankers were expecting the latter to be temporary, realizing too late that they missed big. Nor did they foresee Russia’s decision to invade Ukraine and create a global energy and food crisis would go on to fuel price pressures. Central banks rushed into quantitative tightening, but things are getting no better. Inflation among developed economies keeps reaching multi-decade highs while business activity shrinks. Short-lived hopes? In this scenario, there is a small chance the US economy would expand modestly in the second quarter of the year. Maintaining growth in the third quarter of the year, however, seems unlikely. Treasury Secretary Janet Yellen said the country is not in a recession but in “a period of transition in which growth is slowing.” “A recession is a broad-based contraction that affects many sectors of the economy. We just don’t have that,” she added. And indeed, some sectors of the economy are doing well. Job creation has been robust in the last two years, while business activity decelerated but remains in expansionary territory. A figure signaling growth will indicate the US is skipping a recession, but any number below 1% will bring little relief to those concerned about the economic slowdown. Rather it will just buy a bit more time. USD possible scenarios Generally speaking, the dollar has more chances of appreciating in a risk-averse environment than falling amid poor local data. The EUR is the greenback’s weakest rival as local turmoil caps demand. Should the dollar surge, selling EUR/USD seems the best choice. The Swiss Franc, the British Pound and the Australian dollar are at the other end of the range. A falling dollar plus resurgent stocks will make AUD/USD the preferred choice, while, in the case stocks fall, eyes should turn to CHF and GBP.

The US Federal Reserve has raised rates by 75 bps as expected to around 2.50%. An acknowledgment of some softening has been balanced by comments about a strong economy.  Fed Chair Powell has dropped guidance, moving to a meeting-by-meeting basis. Markets cheer lower chances of tougher policy, and it may prove short-lived.  "We think it's time to go to a meeting-by-meeting basis" – investors have seen this key quote as lowering the chance for yet another 75 bps rate hike in September. Markets are up, the dollar is down. Federal Reserve Chair Jerome Powell has also skipped a chance to push back against market expectations for rate cuts next year.  Is this rally justified? Another quote by Powell, that the Fed is looking for "compelling evidence that inflation is falling" may be interpreted as the Fed is in search for an excuse to slow down. It seems markets were on a quest to take profits on dollar longs, and for a "buy the dip" reaction in markets. However, it may prove short-lived. After the Fed raised rates by 75 bps as expected, it only provided token acknowledgement of some moderation in economic activity: However, it is followed by the word "nonetheless" and then talk about economic strength: Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Moreover, a meeting-by-meeting basis also leaves room for nasty upside surprises in inflation and further strong job reports. The current repricing of September's rate hike seems premature. There are two inflation reports and two Nonfarm Payrolls ones ffrom now unitl the next Fed meeting on September 21.  Being more data dependent means more market volatility – and that can go both ways.  Perhaps the first sign of weakness would come from weekly jobless claims. An increase to above 300,000 would lower Fed expectations and push the dollar further down. However, while that isn't happening, the upcoming inflation report could send the dollar skyrocketing.  All in all, the current swing could be premature. 

The US Federal Reserve has raised rates by 75 bps as expected to around 2.50%. An acknowledgment of some softening has been balanced by comments about a strong economy.  Fed Chair Powell has dropped guidance, moving to a meeting-by-meeting basis. Markets cheer lower chances of tougher policy, and it may prove short-lived.  "We think it's time to go to a meeting-by-meeting basis" – investors have seen this key quote as lowering the chance for yet another 75 bps rate hike in September. Markets are up, the dollar is down. Federal Reserve Chair Jerome Powell has also skipped a chance to push back against market expectations for rate cuts next year.  Is this rally justified? Another quote by Powell, that the Fed is looking for "compelling evidence that inflation is falling" may be interpreted as the Fed is in search for an excuse to slow down. It seems markets were on a quest to take profits on dollar longs, and for a "buy the dip" reaction in markets. However, it may prove short-lived. After the Fed raised rates by 75 bps as expected, it only provided token acknowledgement of some moderation in economic activity: However, it is followed by the word "nonetheless" and then talk about economic strength: Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. Moreover, a meeting-by-meeting basis also leaves room for nasty upside surprises in inflation and further strong job reports. The current repricing of September's rate hike seems premature. There are two inflation reports and two Nonfarm Payrolls ones ffrom now unitl the next Fed meeting on September 21.  Being more data dependent means more market volatility – and that can go both ways.  Perhaps the first sign of weakness would come from weekly jobless claims. An increase to above 300,000 would lower Fed expectations and push the dollar further down. However, while that isn't happening, the upcoming inflation report could send the dollar skyrocketing.  All in all, the current swing could be premature. 

A combination of factors dragged EUR/USD to over a one-week low on Tuesday. The European gas crisis weighed heavily on the euro amid resurgent USD demand. The downside remains cushioned ahead of the highly anticipated FOMC decision. The EUR/USD pair witnessed aggressive selling on Tuesday and tumbled nearly 150 pips from the daily swing high, around mid-1.0200s. The sharp intraday fall dragged spot prices to over a one-week low and was sponsored by a combination of factors. The shared currency was weighed down by renewed worries over a halt of gas flows from Russia, which could trigger an energy crisis in the Eurozone. In fact, Gazprom announced that the flow through Nord Stream 1 will be cut to 20% of capacity in the next day or two, for an indeterminate time. Though temporary, the supply reduction could drag the region's economy faster and deeper into recession. Apart from this, resurgent US dollar demand exerted additional downward pressure on the major. The prospects for a global economic downturn continued weighing on investors' sentiment, which was evident from the prevalent risk-off environment. This, in turn, assisted the safe-haven USD to stage a solid rebound from the vicinity of its lowest level since July 5 touched the previous day. Apart from this, a late pickup in the US Treasury bond yields further underpinned the greenback and helped offset mostly disappointing US macro data. The Conference Board's US Consumer Confidence Index fell for the third consecutive month and came in at 95.7 in July, missing estimates. Adding to this, New Home Sales fell 8.1% in June and overshadowed the Richmond Fed Manufacturing Index, which unexpectedly bounced to 0 in July from -11 in the previous month. The overnight USD move up, however, lacked follow-through amid uncertainty over the Fed's tightening path, which, in turn, offered some support to the EUR/USD pair during the Asian session on Wednesday. The recent softer US economic releases have forced investors to scale back their expectations for more aggressive rate hikes by the US central bank. Hence, the focus will remain glued to the outcome of a two-day FOMC monetary policy meeting, scheduled to be announced later during the US session. The Fed is widely expected to raise interest rates by 75 bps and leave the door open for further hikes. This, along with Fed Chair Jerome Powell's remarks at the post-meeting presser, would influence the USD and provide a fresh impetus to the major. Heading into the key central bank event risk, traders might take cues from the US Durable Goods Orders data. Apart from this, the US bond yields and the broader market risk sentiment will drive the USD demand, which, in turn, should allow traders to grab short-term opportunities around the EUR/USD pair. The fundamental backdrop, however, seems tilted in favour of bearish traders, suggesting that any intraday move could be seen as a selling opportunity. Hence, it would be prudent to wait for strong follow-through buying before positioning for an extension of the recent recovery from the lowest level since December 2002 touched earlier this month. Technical Outlook From a technical perspective, spot prices, so far, have struggled to break through a resistance marked by the top end of a short-term descending trend channel. Furthermore, repeated failures near the 38.2% Fibonacci retracement level of the 1.0787-0.9952 downfall suggest that the recent recovery move might have already run out of steam. Some follow-through selling below the 1.0100 round-figure mark would reaffirm the negative bias and make the EUR/USD pair vulnerable to retesting the parity mark. The downward trajectory could further get extended and force spot prices to challenge the YTD low, around the 0.9950 region. On the flip side, the 1.0180 region, followed by the 1.0200 mark should now act as an immediate hurdle ahead of the aforementioned descending channel resistance. The latter is currently pegged near the 1.0215-1.0220 supply zone, which if cleared could lift the EUR/USD pair back towards the 38.2% Fibo. level, around the 1.0275-1.0280 region. Sustained strength beyond, leading to a subsequent move above the 1.0300 mark, would be seen as a fresh trigger for bulls. Spot prices could then accelerate the momentum and aim to reclaim the 1.0400 round figure.

The US Federal Reserve is set for another 75 bps rate hike on July 27. Fed Chair Powell's pledge to fight persistenly high inflation and policy guidance hold the key.  The US dollar is basing to kickstart a fresh rally towards a two-decade high. Despite an imminent technical recession in the US, the Federal Reserve (Fed) is determined to deliver another super-sized rate hike when it concludes its two-day policy meeting on July 27. Fed Chair Jerome Powell’s response to fighting inflation will be closely examined alongside the policy guidance for the September meeting. Inflation peaking, not so far After announcing the largest rate hike since 1994 in June, the Fed is set for the second consecutive 75 bps rate hike at its July policy meeting, lifting the federal funds rate range to between 2.25% and 2.5%. In doing so, the world’s most powerful central bank will be effectively ending the pandemic-era support for the US economy. Markets are wagering a roughly 80% chance of another 75 bps rate hike by the Fed this month when compared to a 20% likelihood of a full percentage-point rise, per CME’s Fed Watch Tool. The odds of a 100 bps rate hike at the July meeting had jacked up to over 95% after the US inflation came in hotter than expected in June. Surging gas, food and rent costs catapulted US inflation to a new four-decade peak in June, which arrived at 9.1% YoY, much higher than May’s 8.6% jump. On a monthly basis, prices rose 1.3% from May to June, another substantial increase, after prices had jumped 1% from April to May. The inflation scorcher squashed expectations of peaking consumer prices and bolstered the bets for a 1% hike in rates. At the June post-policy meeting press conference, Powell acknowledged that the rise in the University of Michigan’s five year ahead five-year inflation expectations from 3.0% in May to 3.3% in June was the main reason behind the central bank’s bigger rate hike. However, the June number was revised down to 3.1%, while the Fed’s closely-watched inflation measure fell to 2.8% in July, its lowest in one year. Further, Fed Governor Christopher Waller and Atlanta Fed President Raphael Bostic said that they favor a 75 bps rate hike at the upcoming July meeting. For a potential 100 bps Fed lift-off, Waller said the market is “getting ahead of itself.” These factors, subsequently, watered down expectations for a full percentage point increase. With a 75 bps rate hike fully baked in, all eyes remain on Powell’s commitment to curbing inflation even with an increased risk of tipping the economy into a mild recession. That said, Powell’s rate hike guidance for the September meeting and beyond will hold utmost significance, in absence of any updated projections at the July meeting. Source: CMEGroup The CME FedWatch Tool now shows the probability of a 75 bps September rate increase at a coin flip level while that of a 50 bps move stands at 49%. Meanwhile, money markets are pricing in an 83.4% chance that the target rate range will climb to between 3.25% and 3.5%, or higher by the end of 2022. Powell could afford to pre-commit a 75 bps rate hike for September, given that the US labor market remains in a healthy condition.  The US economy added 372,000 jobs in June, exceeding economists’ estimates for 250,000 jobs. The US unemployment rate held steady at 3.6%, while the labor participation rate ticked slightly down to 62.2%. However, signs of peaking inflation could be the only risk, at the moment, which could dissuade the Fed from committing to larger rate hikes going forward. The Fed is ready to tolerate a weaker growth outlook so long as the inflation monster is controlled. Trading the US dollar with the Fed announcement The US dollar index is trying to find a base just above the 106.00 level after the recent correction from a two-decade top of 109.29. The benchmark 10-year US Treasury yields are holding near two-month lows, as a recession and a 75 bps July rate hike are fully priced in by the market. Therefore, the dollar, as well as, the yields need Powell to leave doors open towards a bigger than 50 bps rate hike for September to keep its commitment to fighting rising prices. Technically, the dollar gauge (DXY) has been gathering support just above the 61.8% Fibonacci Retracement level of the latest upsurge to over twenty-year highs, which is aligned at 105.90. Hawkish policy guidance from Powell will revive the bullish interest in the dollar, breaking the index from its previous week’s range to recapture the 107.50 barrier.    The abovementioned critical 61.8% Fibo support could cave in if the Fed acknowledges signs of peak inflation and/or hints at slowing down on its tightening path...