Markets Eye CPI as Geopolitical Risks Linger

EUR/USD trades below all major moving averages ahead of key inflation data

The recent flare-up in tensions between the United States and Iran triggered a risk-off mood: oil rallied, stocks dropped, and the dollar climbed. But most of these moves were erased after signs emerged that the negotiations would continue.

The FOMC Minutes released last week showed that the Fed is closely watching inflation, which is highly affected by energy prices. A re-escalation in the US – Iran war would send oil and energy prices higher, thus putting pressure on the Fed to tame inflation by hiking the rate.

This means that this week’s Consumer Price Index (CPI) release will have a very high impact on Forex markets. A higher-than-expected value would likely send the dollar higher because the chances of a rate hike would increase. Conversely, a lower value should weaken the greenback. At the time of writing, the CME FedWatch tool shows a 34% chance of a 25-bps hike in July and 51% in September.

Economic Calendar Highlights

The markets will likely remain range-bound until Tuesday at 12:30 pm GMT when the US Consumer Price Index (CPI) will be released. Both the Core and headline yearly figures are expected to come out lower than previously, which would mean that inflation is toning down. The monthly CPI is expected to show a change of -0.1% from the previous 0.5%, while the Core version has a 0.2% forecast, the same as the previous.

Fed Chair Warsh will testify on Tuesday at 2:00 pm GMT on the Semiannual Monetary Policy Report before the House Financial Services Committee. He will also testify on Wednesday at 2:00 pm on the same topic but this time before the Senate Committee on Banking, Housing, and Urban Affairs.

On Thursday, traders will focus on the US Retail Sales report that comes out at 12:30 pm GMT, and the last notable release of the week will be the University of Michigan Consumer Sentiment, scheduled for Friday at 2:00 pm GMT.

Technical Outlook – EUR/USD

The pair is trading in a tight range around 1.1400, and this behavior should continue at least until the release of the CPI on Wednesday. All three moving averages (50-day, 100-day, and 200-day MA) are above the price, indicating a downtrend.

If the price action moves below the current level, the first support is located at 1.1325 (the previous low), followed by 1.1200. However, the dollar would need a strong catalyst to reach 1.1200 quickly. To the upside, the first resistance is represented by the 50-day Moving Average (the blue line), but the overall bias remains bearish.