US authorities in denial, but what does the market think?

  • The US economy contracted for a second consecutive quarter, indicating a technical recession.
  • Inflation on both sides of the Atlantic hit new multi-decade highs in July.
  • EUR/USD’s long-term bearish stance remains intact, with new multi-year lows in sight.

The EUR/USD pair ended the last week of July unchanged, ending it in the 1.0190 price zone. At the same time, it ends a second consecutive month with heavy losses, although it is far from a multi-decade low at 0.9951.

The pair was buoyed by the usual recession fears and the US Federal Reserve, which announced its latest monetary policy decision. European data released these days showed that the economic slowdown continued to deepen at the start of the third quarter and wreaked havoc on the common currency throughout the first half of the week.

Markets changed course on Wednesday as the Federal Reserve brought in some new stuff. As expected, the central bank raised the policy rate by 75 basis points to 2.25%/50%. Chairman Jerome Powell noted that at this level rates have reached neutral and hinted at a slowdown in the tightening. The odds of another 75 basis point hike dwindled to around 20% in September, an unexpectedly dovish surprise. According to Powell & co, the next rate hikes will be a case-by-case decision.

In addition, the central bank reaffirmed its commitment to “rapidly reduce inflation” while noting that the economy remains resilient. Finally, Powell said that “nothing works without price stability,” indicating that policymakers are more concerned about overheating inflation than slowing economic progress.

Nevertheless, US inflation continues to soar. The personal consumption expenditure price index rose to 6.8% year-on-year in June from 6.3% in May, while the core index jumped 4.8% over the same period. period. The Fed is stuck between a rock and a hard place as further tightening to control inflation will add a burden to economic growth. The makers may have offered a confident image, but that’s not what’s behind it.

A recession that is not one

Wall Street rallied after the announcement, also helped by strong earnings reports. Fears remain, but the dollar fell and its bid for a rally was shattered on Thursday by the preliminary estimate of second-quarter US gross domestic product. According to official figures, the economy contracted at an annualized rate of 0.9%, a second contraction in a row and the birth of a technical recession.

Following the release, several US authorities downplayed the negative figure. Federal Reserve chief Jerome Powell anticipated it on Wednesday, saying a disappointing GDP figure should be taken with a grain of salt. US Treasury Secretary Janet Yellen said on Thursday that the contraction in Q2 demonstrates the economy’s shift to more sustainable growth. Finally, President Joe Biden noted that not only President Powell but also several other high profile banking executives are saying we are not in a recession.

Worsening of the European crisis

Things are not looking any better in the EU, which is keeping EUR/USD at the bottom of its annual range, alongside disbelief of a resilient US economy. The preliminary estimate of Germany’s consumer price index for July showed it rose 8.5% year-on-year, from 8.2% in June, while second-quarter GDP fell showed no growth in the three months to June. For the EU as a whole, the consumer price index hit a multi-decade high of 8.9% in July, according to preliminary estimates. However, the Union grew by 0.7% in the second quarter, according to the preliminary estimate of GDP.

At the same time, Russia has further reduced its natural gas supply to the region after the reopening of the Nord Stream 1 gas pipeline. The European energy crisis is worsening by the day, pushing inflation higher and slowing progress economic.

The latest optimism in financial markets seems temporary, and the dollar is gaining ground against its high-yielding rivals. The fact that safe havens are ending the week higher against the greenback somehow reflects market sentiment, regardless of the positive tone in equities.

To be continued

The macroeconomic calendar will be lighter next week, but it will include some key figures that will give additional clues about where the major economies are doing. Germany and the EU will release June retail sales, while S&P Global will release the latest July PMIs for all major economies. The United States will release the official ISM manufacturing PMI for the same month, expected at 52, vs. 53 in June, and the ISM Services PMI, expected at 53.7 vs. 55.3 in June.

At the end of the week, the United States will release the July nonfarm payrolls report. The country is expected to have created 260,000 new jobs during the month, while the unemployment rate is expected to remain stable at 3.6%. A dismal outcome of the NFP report will once again sound the alarm and shake market confidence.

EUR/USD Technical Outlook

The EUR/USD pair maintains its long-term bearish position. The pair retreated for a second straight week from the roughly 50% retracement of its last daily decline between 1.0614 and 0.9951 at 1.0280 and settled below the 38.2% retracement of the same slide to 1.0205. Support stands at 1.0150, the immediate Fibonacci level.

Technically, the weekly chart favors a downward extension. EUR/USD continues to develop well below the bearish moving averages, with the 20 SMA heading firmly south at around 1.0600. Meanwhile, technical indicators declined slightly to negative levels, reflecting widespread selling interest.

On the daily chart, the pair struggled around a bearish SMA of 20 for a second straight week, unable to hold above it. The Momentum indicator is moving into positive levels, but the RSI indicator has already resumed its decline and is currently at 41. Finally, the 100 SMA continues to decline, well above the current level, converging with the upper end of the aforementioned range.

A break below 1.0105 will open the door for a retest of the parity, while below it fresh multi-decade lows could be expected, with the main target downside at 0.9880. The pair needs to accelerate through 1.0280 to ignore the negative position and extend its recovery towards 1.0360 and en route to 1.0440.

EUR/USD Sentiment Survey

The FXStreet Forecast Survey shows that sentiment around EUR/USD is slowly changing. The pair should remain neutral on a weekly basis and then resume rising. On average, the pair is seen at 1.0187 next week while hitting the 1.0300 threshold in the monthly and quarterly views. The number of those betting for a downward move is decreasing over time, down to 22% in the broader perspective.

The Overview chart shows that the weekly and monthly moving averages have risen slightly, but also that the longer one maintains a slightly bearish slope. Most targets remain below 1.1000, while the number of betting sub-pairs has declined sharply from previous weeks, somewhat suggesting that the formation of a temporary bottom is underway.

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