{x} | Trading.live

Abstract: Data released on Wednesday showed that the inflation rate in the UK was higher than expected for the fourth consecutive month, which increased the pressure on the Bank of England (BOE) to raise interest rates more sharply and made investors continue to worry about the sticky growth of global inflation.

Fundamentals

On Wednesday, the UK CPI in May remained at 8.7%, and the market expectation was lower than last month, which increased the possibility that the BOE would raise interest rates by 50 basis points instead of 25 basis points on Thursday. The core CPI rose from 6.8% in April to 7.1% in May, which indicates that the inflationary pressure in the UK is still increasing.

Investors raised their bets on further interest rate hikes by the European Central Bank (ECB) after the hotter-than-expected inflation data in the UK supported the reasons for further tightening.

Before the report was released, ECB Executive Board Schnabel warned that officials should not be complacent about the slowdown in inflation, nor should they worry too much about the increase in borrowing costs. Although the overall inflation rate in the eurozone is slowing down, it is still more than twice the ECB's target of 2%, and policymakers have made it clear that they are determined to keep inflation under control.

ECB Executive Board Schnabel previously delivered a speech on "The Risk of Stubborn Inflation", in which she said that the ECB should "rather do too much than do too little". This has increased market confidence that the ECB will raise interest rates in July and September, raising the deposit interest rate to 4%.

According to the swap transactions related to the date of the policy meeting, the money market has completely digested the expectation that the terminal interest rate of the ECB will be 4% before October, and it seems almost certain to raise interest rates by 25 basis points at next month's meeting. The last time such pricing was in March this year.

Although the bitmap updated by the Federal Reserve last week indicates that it may raise interest rates twice more, investors find it hard to believe this. Fed Chairman Powell did not convince them at the press conference after the decision. However, on Wednesday and Thursday, he will get another chance to deliver his message. If Powell emphasizes the need for long-term higher interest rates, because there is still a long way to go to complete this work, then the USD may rise and the stock market may fall. Nevertheless, since inflation expectation is not an accurate forecasting tool, but a comparison tool and an untouchable moving indicator, it is still too early to think that the USD is bullish.

We expect the EURUSD to continue the good upward trend of last week, break through the integer threshold of 1.1000 in one fell swoop, and then rise further next year.

Technical Analysis

The EURUSD experienced a slight correction for two consecutive trading days after hitting a 13-month high of 1.0971 last week. However, since the price hit the May low of 1.0635, the EURUSD has been in a state of recovering lost ground. From the performance of several major currency pairs, the correction range of the EURUSD is the smallest; So, does this mean that there is no room for a decline? We believe that at least for now.

Among other things, momentum indicators now suggest that risks are tilted to the upside in the near term. Specifically, the RSI has flattened above the neutral threshold of 50, while the fast and slow EMAs of the MACD have jumped above the 0-axis.

If the positive momentum is further enhanced, the integer threshold of 1.1000 may become the first obstacle for bulls to clear. After breaking through this range, the development of the February high of 1.1032 may push the price to a level not seen for months. However, the high point of 1.1184 in March 2022 may inhibit its upside.

Alternatively, if the price reverses to the downside, initial support could lie at the 50-day SMA, currently at 1.0880. A break below this range could shift focus to 1.0790. If the bears fail to stop there, it could challenge the May low at 1.0635.

Overall, the latest recovery in EURUSD has been in a state of recovering lost ground and even though there has been a temporary correction, the bullish forces have not yet surrendered. Therefore, the EURUSD will probably continue to enter a consolidation phase until bulls try to push prices higher again. This is because it has no room to fall.

Trading Recommendations

Trading direction: Long

Entry price: 1.0900

Target price: 1.1184

Stop loss: 1.0760

Deadline: 2023-07-05 23:55:00

Support: 1.0880, 1.0830, 1.0785

Resistance: 1.0971, 1.1000, 1.1032