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Market players are waiting for the key US inflation report. Today's data release should determine the price trajector of the US dollar and end its market tug of war with the euro.
Economists expect inflation to ease to 8.7% in July year-over-year from 9.1% in the previous month.
Earlier this week, many analysts stated that USD could decline sharply, should inflation decrease. Falling inflation would increase concerns about the Fed possibly slowing down its rate hike cycle.
However, some believe such a reaction would be short-lived. The Morgan Stanley predicts USD would only increase in the future.
Economists expect today's inflation data to trigger a new US dollar rally, citing estimated core CPI data.
Prices of goods and services excluding food and energy is predicted to rise to 6.1% in July from 5.9% registered in June.
This would mean inflation in the US is yet to peak, and that the Fed would not ease its monetary policy.
According to The Morgan Stanley, the market is underestimating the stickiness of inflation in the US, as well as the Fed's resolve in tackling it.
It would take the Fed several 75 bps hikes to bring inflation back to the target level of 2% as soon as possible.
Yesterday, James Bullard, the president of the Fed Reserve Bank of St. Louis, stated that interest rates should be increased to 4% by the end of the year.
Currently, the rate is in a range of 2.25-2.5%, indicating that the Federal Reserve would likely keep its tightening pace unchanged at its next meeting.
Renewed speculation about a 75 bps hike in September caused by Bullard's remarks has given significant support to the US dollar early on Wednesday.
EUR/USD is facing strong resistance at 1.0220, despite the growing risk of falling inflationary pressure ahead of the CPI data release.
If today's report does not meet expectations and inflation increases, the US dollar could skyrocket.
In this situation, EUR/USD could plunge below parity to 0.9700, The Morgan Stanley predicts.
Experts note that the European currency has no factors that could drive it upwards, unlike the US dollar. The euro is in an increasingly precarious position as the situation in the region continues to deteriorate.
Just like the US, the EU is fighting record high inflation by increasing interest rates. The European Union is also facing a recession, similar to the US.
However, the EU's situation is more dire due to the ever-escalating energy crisis.
Rising risks of a shutdown of natural gas supply in EU countries worsen the euro's prospects.
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