The euro and the pound gained ground against the U.S. dollar following news that core inflation in the U.S. decreased for the fourth consecutive month on a yearly basis in July. This decline is expected to enable the Federal Reserve to begin cutting interest rates next month.
The so-called core Consumer Price Index (CPI), which excludes food and energy prices, increased by 3.2% in July compared to the previous year. This marks the slowest pace since early 2021. The monthly figure rose by 0.2%, slightly above economists' initial forecasts, which tempered the enthusiasm of risk asset buyers. Economists consider the core measure to be a better indicator of inflation than the overall CPI. Meanwhile, the overall Consumer Price Index also rose by 0.2% compared to the previous month and by 2.9% compared to the previous year. According to the Bureau of Labor Statistics, rising housing costs accounted for nearly 90% of the monthly increase.
It is clear that overall inflation is trending downward as the U.S. economy begins to slowly lose momentum. Combined with a weakening labor market, where unemployment has risen for four consecutive months, it is expected that the Federal Reserve will start cutting interest rates as early as next month. The size of the initial cut will likely be determined by incoming data. However, even if the Fed decides to cut rates (and there will be numerous reasons to do so), the committee is likely to maintain a restrictive policy overall until it achieves its 2.0% target.
It's worth noting that before the September meeting, officials will receive additional inflation data and another employment report, which will be carefully analyzed after disappointing July data triggered a sell-off in the currency market and heightened recession fears. Federal Reserve Chair Jerome Powell and his colleagues recently stated that they are now paying more attention to the labor component of their dual mandate, which Powell is likely to emphasize during his speech at the annual Jackson Hole symposium next week.
As mentioned earlier, the most disappointing part of the report was housing costs, which economists and policymakers had expected to decline and bring inflation closer to the Fed's target. Housing costs jumped by 0.4% after a 0.2% increase in June. The equivalent rent (the largest individual component of the CPI) also rose by 0.4%.
Other categories were more encouraging, especially for consumers. Prices for clothing and used cars fell last month. Medical care costs also saw their largest decline on record.
Regarding the current technical outlook for EUR/USD, buyers now need to focus on reclaiming the 1.1020 level. Only this will allow for a test of 1.1050. From there, the pair could move up to 1.1080. However, achieving this without the support of large players will be very challenging. The ultimate target would be the 1.1110 high. In the event of a decline, significant buyer activity is expected around 1.0985. If there is no action at that level, it would be advisable to wait for a drop to 1.0950 or consider opening long positions from 1.0910.
As for the current technical outlook for GBP/USD, pound buyers need to reclaim the nearest resistance at 1.2860. Only this will allow for a move towards 1.2890, above which breaking through this level will be challenging. The ultimate target would be around 1.2910. After this level, a sharper rise towards 1.2940 could be possible. In the event of a decline, bears will attempt to take control of 1.2820. If they succeed, breaking that range will deal a significant blow to the bulls' positions and push GBP/USD down to a low of 1.2780, with the potential to reach 1.2730.
