The EUR/USD pair moved sideways on Tuesday. But despite the increased volatility, the pair did not leave the area of the 7th figure. Traders couldn't decide on a direction, impulsively reacting to mixed fundamental signals.
As we know, Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde stated their positions. They spoke at a forum in Sintra, Portugal. Furthermore, the Eurozone inflation report was published, along with the JOLTs data in the US (number of job openings in the private sector at the end of the reporting month).
Judging by the market's reaction, such a busy economic calendar "overloaded the system" – EUR/USD traders are being cautious and refuse to leave the 7th figure.
This is not surprising, given the contradictory rhetoric from Powell and Lagarde.
According to Powell, the latest inflation reports indicate a slowdown in the growth rate of consumer prices in the US. Powell acknowledged that inflation has (once again) started to ease after a brief period of acceleration. Essentially, Powell stated an obvious fact, as the recent CPI and PPI reports fell into the "red," and the core PCE index (the most important inflation indicator for the Fed) decreased to 2.6% in annual terms – the lowest growth rate since March 2021.
However, despite acknowledging the obvious slowdown in inflation, Powell did not announce a shift towards easing monetary policy. He said that the central bank needs more data before it can start lowering the interest rate.
By doing so, he implied that the rate would remain at its current level in July, and future course of actions would depend on the dynamics of inflation. Notably, following Powell's speech, the probability of a 25 basis points rate cut at the September meeting increased to 65%. Despite this, the dollar maintained its positions and even attempted a counterattack against the euro. This indicates that the market has already partially priced in one rate cut this year, and therefore, the greenback remains relatively unaffected by dovish rhetoric from the central bank. Meanwhile, any signals indicating keeping rates unchanged support the US currency.
Powell managed to deliver both types of signals. On the one hand, he confirmed the slowdown in US inflation, and on the other hand, he said that the central bank needs more data. Moreover, the Fed chair did not specify the conditions under which the Fed would begin easing monetary policy. He also did not discuss the pace of rate cuts, thereby not contradicting the updated Fed dot plot, which indicates that the central bank will cut the rate by only 25 basis points by the end of the year.
Thus, the Fed chair maintained a balance in his rhetoric, rendering himself "useless" for both EUR/USD buyers and sellers. Everyone heard something they wanted to hear, but overall, the scales remain balanced.
Lagarde also tried to maintain balance in her rhetoric. Specifically, she stated that the ECB currently does not have enough evidence to suggest that the threat of inflation has passed. In this context, Lagarde indicated that the central bank would not rush to further reduce interest rates.
This could be seen as a positive signal for the euro, especially in light of the latest Eurozone inflation data. However, the single currency reacted modestly to the ECB head's speech: the EUR/USD pair impulsively rose to the resistance level of 1.0750 (the middle line of the Bollinger Bands on the D1 timeframe) but then it retreated to previous positions.
This calm reaction is explained by the fact that Lagarde was referring to the July meeting when she said there was no need to rush. The market is already confident that the ECB will maintain the status quo in July. The next meeting will be in September, by which time the central bank may be ready for the next round of rate cuts. Moreover, Lagarde said that inflation is moving "in the right direction" and that the central bank has "made significant progress towards disinflation."
Let me remind you that a few hours before Lagarde's speech, key data on Eurozone inflation was published. The harmonised index of consumer prices in the Eurozone fell to 2.5% year-on-year in June, while core inflation remained at 2.9%. Lagarde could have emphasized different aspects in her speech (for instance, she could have expressed concern about the slow pace of reducing inflation), but instead, she delivered a fairly balanced rhetoric. Buyers of EUR/USD reacted positively to her speech, but the bullish momentum faded almost as soon as it began.
Thus, Powell and Lagarde acted by the principle of "a little something for everyone." The Fed chair acknowledged that inflation is slowing down but did not announce a rate cut. Meanwhile, the ECB head suggested a pause in rate cuts but praised the pace of inflation.
The pendulum remained in balance.
To confirm the upward movement, the bulls need to break through the 1.0770 mark (the upper line of the Bollinger Bands indicator on the 4-hour chart). Bears need to go below the target of 1.0680 (the lower line of the Bollinger Bands on the same timeframe). At the moment, the situation is too uncertain to open any trading positions.
