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The euro strengthened against the dollar last week, reaching the 1.0911 resistance level and settling around 1.0880 at the start of trading for the week of the ECB policy announcement. The euro's gains came after the release of data showing that core inflation in the United States slowed to its slowest pace since 2021 in June, driven by a long-awaited slowdown in housing costs. Obviously, that's sending the strongest signal yet that the federal Reserve could cut US interest rates soon.
After the US CPI report, Treasury yields rose, and traders have almost fully priced in rate cuts in September and December. Policymakers will have the opportunity to signal such a move when they meet later in July, especially since the unemployment rate has now risen for three consecutive months. Across the Atlantic, left-wing parties that combined to win the most seats in France's snap election are struggling to come up with a candidate for prime minister. France has been mired in political paralysis since Sunday's vote, with the National Assembly split between three main factions after voters thwarted a far-right bid to seize power.
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On Monday, Federal Reserve Chairman Jerome Powell will give an interview at the Economic Club of Washington in the wake of data showing a welcome decline in inflation. Moreover, Investors will be watching for clues on whether U.S. central bankers are confident enough about the ongoing slowdown in price pressures to cut interest rates. Furthermore, Powell's event opens a week of appearances by other top Fed officials, including Fed members Adriana Kogler and Christopher Waller, and New York Fed President John Williams.
Meanwhile, US retail sales are the highlight on the US economic data calendar. Economists expect a decline in June sales, partly due to a cyberattack that disrupted car dealers and lower gas station receipts. Sales of so-called control groups, which exclude cars, gasoline, food services, and building materials, are also expected to decline. This measure, used to calculate GDP, is seen as an indicator of how budget-conscious consumers are limiting discretionary purchases.
A day after Tuesday's U.S. retail figures, the government is expected to report modest gains in new home construction in June at the slowest pace in four years. However, builders benefited from thin inventories in the resale market even as demand remained constrained by higher borrowing costs. Also on Wednesday, the Federal Reserve will release its June industrial production report, as well as its Beige Book report on economic conditions in each of the central bank's 12 regions.
On the European side, Meet the economist leading Germany's battle against debt. Clearly, Lars Feld doesn't sound hawkish. From his posts in Freiburg and Berlin, where he advises Finance Minister Christian Lindner, Feld helped craft controversial fiscal policies that have hobbled Europe's largest economy as it battles recession and stymied calls from partners like France and Estonia for more aid. Moreover, issuing joint European debt to finance an urgent increase in defence spending.
The economist feels vindicated by the chaos following the elections in neighbouring France, where concerns about rising government spending have led markets to increase the risk premium required to hold government bonds. He added, "It was reassuring to see the spread, and it's important for financial markets to have a disciplinary effect. It ensures that politicians think carefully about what's financially possible," adding that a new euro crisis cannot be ruled out yet.
Overall, debt has become an existential issue in Europe. After unrestricted borrowing during the pandemic, investors and officials are refocusing on public finances, not only in heavily indebted countries like France, which faces scrutiny under EU budget rules. Meanwhile, social Democratic Chancellor Olaf Scholz and Economy Minister Robert Habeck, leader of the Greens, have struggled to revive the German economy through more public spending. As Lindner, whose Free Democratic Party is the smallest in this divided coalition, has blocked their path.
EUR/USD Technical analysis and forecast:
Based on the performance on the daily chart attached, the EUR/USD exchange rate is in an ascending channel and bulls will tighten their grip on the trend by moving towards the psychological resistance level of 1.1000. Technically, we expect the recent EUR/USD gains to be halted pending the reaction to the announcement of the European Central Bank's policy update this week. Consequently, along with signals from officials from both the European Central Bank and the US Federal Reserve. On the other hand, as we mentioned before, the support level of 1.07200 will remain a threat to the current upward correction.
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