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Markets await the US inflation report for July as the data could completely change the balance of power on trading floors. This is why risk appetite fell on Tuesday, with major stock indices in both Europe and North America showing a noticeable drop.
According to forecasts, consumer inflation should slow to 0.2% m/m, but increase to 8.7% y/y in July. The reason is the insufficient supply of goods caused by the supply chain problems that have not yet been resolved.
Business and industrial activity also remain at a high level, the labor market is strong, and wages continue to rise. This indicates that inflation may remain above 6% until the end of this year.
Another factor to consider is the geopolitical tension that is currently happening. Most likely, oil prices will remain high, likely testing $120 once again. The recent decline in quotes has already led to a fall in gas prices in the US, albeit just temporarily.
With all this data, many are pondering whether the Fed will continue its aggressive increase of interest rates. If it does, pressure on the stock markets will rise, while dollar demand will remain strong. However, the situation in the forex market will not change much by the end of the year. EUR/USD may test 1.0000, at least until inflation decreases not only in July, but also in the coming months. In that case, the Fed will no longer seek further rate hikes, which, in turn, will weaken dollar and jump-start a bullish stock market.
Forecasts for today:
USD/CAD
The pair is trading below the resistance level of 1.2900. Negative market reaction to the US inflation report for July will most likely push the quote to 1.2980.
USD/JPY
The pair is trading above 134.70. A negative market reaction could push the quote down to 133.70.
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