03.07.202413:56 Forex Analysis & Reviews: EUR/USD. Can we trust the price increase?

Today, the euro/dollar pair has overcome the resistance level of 1.0750 (the middle line of the Bollinger Bands indicator on the D1 timeframe) and is now attempting to approach the 1.0800 area.

It should be noted that the pair's current rise is primarily due to the weakening of the US dollar. After some initial hesitation, traders interpreted Fed Chairman Jerome Powell's speech yesterday as negative for the greenback, even though he tried to maintain a balanced tone in his rhetoric.

The ISM Manufacturing Index also played a role here. First, it came out in the red zone (48.5 against the forecast of 49.2), and second, it remained in the contraction zone, meaning it was below the 50 mark. Additionally, there is now a clear downward trend, as the indicator has been declining for three consecutive months. This release undermined the positions of the dollar bulls. Further pressure on the greenback was applied by Fed Chairman Jerome Powell, who noted the resumption of inflation slowdown in the US. He indicated that the regulator is ready to begin cutting the interest rate but needs to gather more data first "to ensure that indicators showing a slowdown in inflation reflect price pressures."

In fact, Powell's position could have been interpreted in favor of the greenback, but the market "heard" dovish notes in his speech. The probability of a rate cut at the September meeting has increased to 65% (according to the CME FedWatch tool), putting the dollar under background pressure.

However, there are no grounds for a large-scale (sustainable) weakening of the greenback. Yes, Jerome Powell stated the obvious fact: key inflation reports (CPI, PPI, PCE) for May mostly came out in the red zone or at the forecast level, reflecting a slowdown in US inflation. There is no sensation here. Nor is it a surprise that the Fed might cut the interest rate by 25 points this year. Again, no surprises here. The Fed Chairman also acknowledged this scenario but indicated that the regulator still needs to be ready to announce specific steps towards easing monetary policy. He also did not mention the possible pace of the rate cut or its scale. His comments were vague, stating obvious and well-known facts.

At the moment, it can only be said with confidence that the interest rate will remain at its current level in July. Beyond that, everything will depend on the dynamics of inflation and the situation in the US labor market, which has been discussed a little lately. And that is a mistake.

Let me remind you that the May Nonfarm Payrolls reflected a growth in the wage indicator (average hourly earnings increased to 4.1% y/y, with a forecast of 3.9%) and a strong increase in employment (229,000 vs. the forecast of 175,000). According to preliminary forecasts, the labor market is expected to cool down a bit in June: unemployment should remain at 4%, and the employment growth indicator is expected to fall short of the 200,000 mark (forecast – 189,000). The average hourly earnings indicator is expected to drop significantly to 3.6%.

If the June Nonfarm Payrolls meet the forecast (not to mention if they come out in the red zone), the dollar will be under significant pressure. However, it is worth noting that before the May Nonfarm Payrolls, most experts also predicted weak employment growth and a decline in wage indicators. In the end, the American labor market showed resilience, pleasantly surprising dollar bulls. If this month's Nonfarm Payrolls also surprise traders with a "green print," the likelihood of a rate cut in September will again be in question.

And one more thing. In light of Powell's vague comments, it's worth recalling the recent statements from Fed members, who unanimously called for not rushing to ease monetary policy. Some of them, such as Alberto Musalem, are even ready to support a rate hike if inflation remains at its current level or accelerates again.

Meanwhile, ECB President Christine Lagarde stated yesterday that the central bank has made significant progress on the path to disinflation. According to her, inflation in the eurozone is moving in the right direction. Although she mentioned the possibility of a pause in rate cuts, this could be applied to the July meeting, the outcome of which is already largely predetermined. Therefore, it cannot be said that Lagarde's speech yesterday favored the euro. Quite the opposite, in fact.

Given the current fundamental background, talking about a sustained rise in EUR/USD is premature. Especially with the Nonfarm Payrolls data for June being released the day after tomorrow. Despite the intraday price increase, the pair remains within the 7th figure. For the upward movement to be confirmed, EUR/USD buyers need to secure a position above the 1.0780 target (the upper line of the Bollinger Bands on the H4 timeframe and simultaneously the Kijun-sen line on the D1 timeframe). It makes sense to consider selling after the bears push through the support level at 1.0700 (the lower line of the Bollinger Bands, coinciding with the lower boundary of the Kumo cloud on the four-hour chart).