The US Consumer Price Index (CPI) report, set to be released on Tuesday, is expected to show a respite from inflation in June, primarily due to lower oil costs following the ceasefire between the US and Iran. However, this relief may be short-lived, as the market's focus has shifted to the potential inflationary impact of the AI boom and the ongoing tensions between the US and Iran. The report's implications for the EUR/USD pair and the Federal Reserve's monetary policy decisions are also under scrutiny.
The June CPI data is projected to decline by 0.1% month-over-month (MoM), following a 0.5% increase in May. The annual reading is anticipated to retreat to 3.8%, down from 4.2% in the previous month, marking the highest level since May 2023. Core CPI figures, which exclude volatile food and energy prices, are expected to remain steady at 0.2% MoM and 2.9% year-over-year (YoY).
The decline in oil prices, which dropped by more than 20% in June, has contributed significantly to the expected CPI retreat. This follows a nearly 17% drop in May, bringing oil prices back to pre-war levels. However, the market's reaction to this development may be muted, as oil prices have started to edge higher again due to the US-Iran ceasefire tensions. This raises concerns about the sustainability of the CPI's downward trend.
The Federal Reserve's dual mandate of maintaining price stability and maximum employment is a critical aspect of the CPI report's interpretation. The central bank aims for an inflation rate of around 2% YoY, but the recent multi-decade highs in the CPI have prompted aggressive measures to tame inflation. The Fed's policy decisions, including interest rate hikes, have a direct impact on the US Dollar's strength and, consequently, the EUR/USD pair.
The EUR/USD pair's technical outlook is uncertain. While the pair has stabilized slightly above 1.1400 after touching a 12-month low, the Relative Strength Index (RSI) and the 20-day Simple Moving Average (SMA) suggest hesitancy among buyers. The pair's interim resistance levels are at 1.1500 and 1.1550-1.1555, while the first support level is at 1.1350, followed by 1.1220 and 1.1160.
The market's concerns about the AI boom's potential inflationary effects are also significant. The massive capital flow into AI infrastructure, rising industrial electricity costs, and price premiums on tech hardware and software subscriptions could keep core services and goods inflation elevated. The Fed's study on the 'Computer Software and Accessories' category of the Personal Consumption Expenditures (PCE) Price Index further highlights the potential impact of AI on inflation.
Despite the expected monthly decline in the CPI, investors may not view it as a convincing sign that could derail the Fed's policy tightening plans. The CME FedWatch Tool suggests a 30% probability of a 25 basis points (bps) interest rate hike in July and a 77% chance of at least one rate hike by the end of the year. This indicates that the market is still pricing in a potential tightening of monetary policy.
In conclusion, the US Consumer Price Index report's impact on the EUR/USD pair and the Federal Reserve's monetary policy decisions is multifaceted. While the June CPI data may show a respite from inflation, the market's focus on the AI boom and US-Iran tensions could overshadow this development. The EUR/USD pair's technical outlook remains uncertain, and the Fed's policy decisions will continue to shape the currency markets.
