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Whatever the data on US inflation for July, they are unlikely to change the outlook of the Fed. The FOMC will not decide to slow monetary restrictions based on a single report. Much more important is the change in the views of the world's largest central banks, led by the Fed. Previously, they reported on the expected size of the rate increase, now they have switched to data dependence mode. This leads to increased volatility in Forex and will support the demand for the US dollar.
Central banks tend to act like a pack led by the Fed. And Jerome Powell's statement that the FOMC will make decisions on a meeting-by-session basis resonated with other major economies around the world. The Reserve Bank of Australia said that the future path of the cash rate is not set in advance, and rate changes will depend on incoming data. Neither the Fed nor anyone else knows how inflation and GDP will behave. They can only stupidly raise rates, hoping to reduce the demand for labor with a subsequent slowdown in wages and prices. But as long as Jerome Powell and his colleagues look only at inflation, the US dollar will remain strong.
The markets would very much like the Fed to shift its focus—to pay attention to economic growth. This forced the Central Bank not only to stop but also to start cutting rates after a series of rate hikes in 2008 and 2019. However, investors are likely wishful thinking. First, inflation remains at elevated levels and is likely to stay there for a very long time. Secondly, a recession is not expected soon. If it were, the Fed would hardly have paused. It has experienced in the 1970s when the US had to go through two recessions to beat inflation.
Dynamics of US inflation and Fed rates
Of course, one could argue that inflation will come down on its own, partly due to the elimination of supply chain problems. But there is one psychological aspect here. The Fed did this already at the end of 2021. It argued that high prices were temporary and continued to sit back. This resulted in an uncontrolled increase in CPI. It is unlikely that the Central Bank will want to step on a rake.
In my opinion, the markets are too fixated on inflation, and as soon as they see that it has remained at the same levels, they will return to other factors of the Forex exchange rate. The approaching heating season is bad news for the Eurozone net importer of energy commodities and good news for the US LNG exporter. The approach of early elections in Italy will put pressure on both the ECB and the euro.
Technically, on the EURUSD daily chart, the combination of the Three Indians and the Splash and Shelf patterns gives chances for a downward trend reversal. However, for this, the "bulls" need to bring the pair beyond the upper border of the consolidation of 1.01–1.03 and gain a foothold there. In my opinion, this is unrealistic, so selling the euro on growth remains relevant.
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