Euro extends gains

The euro continues to move higher early in the week.  In the North American session, EUR/USD is trading at 1.0240, up 0.47% on the day.

The US dollar, which has been on a downward correction recently, flexed some muscles on Friday, after a superb nonfarm payrolls report, and posted broad gains. However, the gains proved to be short-lived, and the euro has now recovered all of Friday’s losses.

Fed officials were already pushing back against the market’s perception that the rate-hike cycle was almost over, and with the latest employment numbers, the Fed may feel the need to remain aggressive and respond with another supersize 0.75% increase at the next policy meeting in September. Fed Chair Powell has said that the Fed will be data-dependent as it considers its next move, which means that upcoming inflation and employment reports will be crucial and carefully monitored by the markets and Fed officials.

Germany, US releasing inflation data

In Europe, it’s a light economic calendar this week. Final German CPI is expected to come in at 7.5% YoY, which is another distress signal of “Brussels, we have a problem”.  Inflation shows no signs of easing, and the ECB is playing catchup, having finally raised rates last month. A benchmark rate of 0.50% won’t do much to slay soaring inflation, although the perception that the central bank is raising rates is certainly helpful.  Eurozone inflation hit 8.9% in June, up from 8.1%, and the ECB is hoping that the numbers don’t get even worse when the July inflation report is released next week.

The US will release the July inflation report on Wednesday. Headline CPI is expected to fall to 8.7%, down from 9.1%, while core CPI is forecast to rise to 6.1%, up from 5.9%. If the headline reading is higher than expected, it will put pressure on the Fed to remain in hawkish mode and the dollar should respond with gains. Conversely, a soft reading from the headline or core releases would ease the pressure on the Fed and could send the dollar lower.

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EUR/USD Technical

• EUR/USD faces resistance at 1.0274 and 1.0370
• There is support at 1.0199 and 1.0103

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