Strength for the Dollar After Higher Inflation

The figure of 2.7% for non-core annual inflation in the USA in June was in line with the majority of expectations, but still provoked a fairly strong reaction by the dollar. It seems to have decreased the probability of the Federal Reserve (‘the Fed’) cutting in September. This article summarises the last big release and its context, then looks briefly at the charts of EURUSD and USDJPY.

The latest data on inflation showed a four-month high for the annual headline figure:

Food, transport and used vehicles were among the main drivers of the higher rate of inflation. This release questions further the idea that inflation is on track to return to 2% sustainably. While both the monthly and annual core figures were slightly below expectations, they also rose.

Rising inflation is important because it’s one of the key factors cited by the Federal Open Market Committee influencing upcoming decisions. Alongside it, the Fed’s also looking at the developing situation with tariffs and governmental policy in general plus geopolitical risks.

The significant shift after the last release of inflation was the rise in the probability of the Fed holding in September as well according to CME FedWatch. A hold at the current 4.25-4.5% on 30 July seems almost guaranteed with a probability of around 97%, but the probability of the Fed holding on 17 September too is now around 45%.

This isn’t a very surprising scenario. Since the beginning of the current cycle of loosening policy, expectations for upcoming cuts have shifted back fairly consistently, so the default expectation is for the Fed to be cautious and prefer leaving policy moderately restrictive for longer. That’s broadly positive for the dollar, but the greenback’s performance depends heavily on trade tension and the ebb and flow of confidence in the American government’s announced and actual policies on tariffs.

Euro-dollar Pushes Below $1.16 for Now

The announcement of 30% American tariffs on the EU from 1 August caused some negativity on the prospects for the bloc’s economy, but as with any similar announcement so far this year, it’s likely that the figure can be negotiated down or just backtracked by the American government. A more immediate important factor driving euro-dollar down has been the significant rise in American annual headline inflation in June to 2.7%. The ECB is likely to cut once more this year and the Fed twice, but there’s some intrigue on the timing of the latter.

The retreat from the area of $1.18 – a high of nearly four years – has so far been fairly consistent with some momentum. However, $1.16 still seems to be an important battleground, with the long wick on 16 July indicating buying pressure. With the price currently oversold and there not being a clear uptick in selling volume, the 50 SMA around $1.155 might be an important short-term dynamic support.

A move back up to the 38.2% monthly Fibonacci retracement around $1.166 seems possible in the next few days, depending on the volume of buying and reactions to upcoming news. For now, the movement seems more like a relatively small retracement in the context of the uptrend than the beginning of a new downward or sideways trend, but this depends on the reaction to the ECB’s meeting on 24 July as well.

Dollar-yen Remains at a Crossroads

USDJPY gained more strongly than most other major pairs with the dollar in the aftermath of June’s higher American inflation. One of the key factors here seems to be generally disappointing trade data from Japan and rising concern in some quarters of a technical recession; weaker economic figures challenge the prevailing expectations that the BoJ will continue to hike rates, but a hike on 31 July still seems fairly likely.

¥149, also the area of the 200 SMA, is a key area: a close above there might signal a push up to ¥150 or possibly even higher. However, the price still hasn’t clearly broken above the previous resistance of the 38.2% weekly Fibonacci retracement slightly above ¥148. Another close above there with a higher volume of buying might give more confidence in further gains.

There isn’t an obvious short-term support. ¥147, the limit of 16 July’s tail, is a possibility, but this isn’t confirmed. The 20 SMA is a lot lower; a move beyond there into the value area with the 50 and 100 SMAs seems very unlikely for now unless there’s major surprising news of tariffs or expectations for monetary policy shift dramatically.

The opinions here are personal to the writer; they do not represent the opinions of Exness or FX Empire. This is not a recommendation to trade.

This article was submitted by Michael Stark, an analyst at Exness.