EUR/USD to New 2023 Highs After Soft US CPI Inflation

EUR/USD Analysis

The US Consumer Price Index decelerated sharply to 3% y/y in June, which is the lowest level in more than two years. The core reading which strips food and energy prices has been more persistent, but yesterday data showed a significant moderation to 4.8% y/y, marking the smallest increase since October 2021.

These data will be music to the ears of the Fed, since they show that inflation is cooling, just two weeks ahead of the July 25-26 meeting. It will be interesting to see if Chair Powell starts talking about disinflation again, a term he had used a lot in February ^[1], but dropped after a while.

Policymakers had paused last month, but the updated projections imply an additional 50 basis points of hikes this year, while Fed-speak had become increasingly more hawkish since. Markets did not really ever embrace that.

CME's FedWatch Tool assigns the highest probability to just one 0.25% move in July and a terminal rate of 5.5%. However, investor now seem to be turning their focus towards the timing and extent of rate cuts, with the FedWatch tool placing the first cut as early as January, at the time of writing. ^[2]

EUR/USD jumped to new 2023 highs as a result, as the ECB has more ground to cover on inflation and monetary tightening. The common currency eyes 1.1233, while 1.1495 is distant. From a technical prospective, the move is stretched and a pullback towards 1.1000 would not be unreasonable, but the downside is well protected from 1.0900 on.

Even though inflation has been moderating, the US economy continues to perform better that expected and the labor market remains tight, despite some signs of cooling. Bringing inflation down without unemployment rising defies the Phillips Curve and points to the immaculate disinflation scenario. Fed's Goolsbee (voter) seemed to embrace that, speaking on CNBC after Friday's NFPs. He feels the central bank is on that "golden path" to achieve its inflation goal "without a recession". ^[3]