US inflation did not surprise today – neither by a breakthrough growth, nor by a disappointing decline. Almost all components of the release came out at the level of forecasts, reflecting a slight slowdown in the pace of inflationary growth. After some thought, traders interpreted today's figures not in favor of the greenback.
In particular, bulls of the EUR/USD pair "could afford" to go for a correction, starting from a 4-month low of 1,1706. However, this corrective growth looked rather faded – the momentum almost immediately began to fade, confirming the indecision of the EUR/USD bulls. In fact, the pair reached only yesterday's highs (1.1745), after which it lay down to drift. Traders were in a somewhat confused state, because the euro still has no arguments for its own appreciation. In other words, the bulls of EUR/USD could not pick up the falling banner and develop a large-scale upward movement. As a result, the indecision of the bulls turned against them – traders began to close long positions, thereby exerting pressure on the pair. All this suggests that the greenback cannot be written off – if only because, despite the lack of breakthrough growth, US inflation is at a high level against the background of continuing disruptions in the supply chain and increased demand for services.
So, the overall consumer price index in July was at 5.4% (as in June), exceeding the forecasts of most analysts, who predicted a slight decline to 5.3%. On a monthly basis, the overall CPI slowed its growth, reaching the level of 0.5% (in June, this indicator was at the level of 0.9%). The core consumer price index, excluding food and energy prices in annual terms, came out in accordance with forecasts – at the level of 4.3%. But in monthly terms, the indicator was in the red zone, falling short of the forecast values. Instead of a modest growth to the level of 0.4% (after the June growth to 0.9%), the indicator rose to only 0.3%.
According to some analysts, inflation in the United States may have reached its peak values – but this does not mean that in the near future the indicators will show a downward trend. According to various estimates, significant price pressure will remain at least until the end of this year. Many analysts also assume that inflation will remain at high values in the first half of 2022. It should be recalled here that the price index for basic personal consumption expenditures (the most tracked inflation indicator by Federal Reserve members) jumped by 3.5% in June – this is the strongest increase in the indicator over the past 30 years.
It should also be noted that analysts' expectations regarding the growth of US inflation in July were overstated. For this reason, the dollar showed only a formal reaction, having slightly fallen in the main dollar pairs.
By the way, other fundamental factors also exerted indirect pressure on the US currency today. In particular, well-known to market participants, Senator Joe Manchin (representative of the Democratic Party) "expressed serious concern" about the possible consequences of the adoption of a large-scale spending bill in the amount of $3.5 trillion. He made the corresponding statement after the US Senate approved the so-called "Biden plan", which provides for the creation of new programs, including free kindergartens and community colleges, paid family leave and a civilian climate corps, whose employees will be engaged in environmental projects.
According to Manchin, such large-scale budget expenditures indicate "irresponsibility", since the US economy is already recovering.
Here it is necessary to explain why the opinion of one Democratic senator is so important. The fact is that today the Democrats approved only the budget resolution, and not the bill itself. This procedural step allows representatives of the Democratic Party to adopt the law by a simple majority. But in the Senate (unlike the House of Representatives), the Democrats do not have spare votes – they have a 50/50 ratio with the Republicans + the decisive vote of US Vice President Harris. If at least one Democratic senator opposes, the bill will not gain the force of law. By the way, when one of the previous aid packages was adopted (this spring), Joe Manchin had to be literally persuaded to vote " yes " – the negotiation process lasted about 11 hours. As a result, he still supported the presidential initiative, and the 1.9-trillion-dollar law was sent to Biden for signature. Given Manchin's current position, this situation may happen again.
Fed representative Thomas Barkin (who has the right to vote this year) also exerted some pressure on the greenback today. He said that the US economy may need "at least several months" to reach the conditions necessary to start curtailing QE. After the hawkish statements of many of Barkin's colleagues (in particular, Bostic, Rosengren, Clarida), his rhetoric sounded disappointing.
Nevertheless, in my opinion, the euro-dollar pair has not exhausted the potential of its downward movement. US inflation was not surprised by the breakthrough, but remained at a high level, confirming the validity of the hawkish expectations of traders. While the European Central Bank continues to maintain a dovish position, excluding the option of an early curtailment of QE. As for the fundamental factors of a political nature, they usually have a "short shelf life". The main battles around Biden's economic initiatives will unfold in the fall, so today's demarche of Senator Manchin is relevant "in the moment", but not in the long term.
Thus, it is advisable to use the current corrective growth of the EUR/USD pair to open short positions, since the weakening of the dollar is most likely temporary. The first support level (the target of the downward movement) is located at 1.1710 (the lower line of the Bollinger Bands indicator on the timeframe). The main support level is at 1.1650 - this is also the lower line of the Bollinger Bands, but already on the weekly chart.
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