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Taking advantage of the massive closing of positions within the framework of carry trade operations and the ECB's unwillingness to copy the Fed and switch to targeting average inflation, the EUR/USD bulls launched a counterattack and managed to pull the pair's quotes out of the 3-month lows. The euro decided to play cat and mouse with the US dollar, having both a slower growing economy and a longer-term asset purchase program. Well, let's see how it all ends.
High global risk appetite, expectations of a strong global economic growth, and low volatility are three key factors that allow gamblers to move their money from low-yield assets to high-yielding ones. Simply put, take loans in Japan or Europe and place the funds received in the markets of developing countries. Alas, in July, carry traders seemed to be placed in a difficult situation.
The spread of the COVID-19 delta variant across the planet and a series of disappointing data from the United States, the Eurozone, and China have raised doubts that the global GDP recovery will be violent. The holiday season increases the risks of a decrease in liquidity and an increase in volatility. Finally, the fall in US stock indices signals a decline in global risk appetite. If you add to this the slow vaccination in developing countries, it becomes clear that it is necessary to flee from the assets issued there. The money is returned to Japan and Europe, as a result of which USD/JPY quotes are falling and EUR/USD is growing.
How can the dollar respond? Strong macrostatistics, as well as the ability of the introduced vaccines to cope with the delta variant. In this regard, the week of July 16 is fundamentally important for the major currency pair. The key event will be the release of data on US inflation. Trading Economics believes that the core CPI slowed down in June from 3.8% to 3.7%, Nordea Markets, on the contrary, expects it to accelerate to 4%. According to the company, inflation will be long-term, not short-term, since about 40% of the structure of its base index is related to rent, and this is a lagging indicator in relation to the cost of housing.
Dynamics of real estate prices and rents in the United States
Nordea Markets predicts that inflation will pick up even more momentum in the fall, which, coupled with the expiration of stimulus checks and increased employment, will force the Fed to act aggressively.
In my opinion, this scenario looks quite realistic. The Fed is clearly unhappy with mortgage bond purchases fueling real estate prices, and will soon begin to taper QE. Further growth in inflation and lower unemployment will add fuel to the process of normalizing monetary policy.
However, autumn is still far away, and the euro has the opportunity to continue playing cat and mouse with the US dollar. EUR/USD is sliding into consolidation and we need to be ready for this.
Technically, a breakout of the resistance at 1.188 is fraught with the development of a corrective movement in the direction of 1.193 and 1.1965, where signals for medium and long-term sales should be looked for as part of the transformation of the Shark pattern into 5-0.
EUR/USD, Daily chart
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