Key Takeaways:
Sterling staged a powerful reversal from a key Fibonacci floor in late June, rallying more than 400 pips into a fresh monthly high as cooling US inflation data drove the dollar to a one-month low.
GBP/USD tested a low near 1.3143 in late June — the 61.8% Fibonacci retracement of the March-to-May rally — before buyers stepped in. The pair has since ripped higher, touching its strongest level since mid-June on Wednesday as the dollar came under broad selling pressure.
"The hot jobs number took March off the table for cuts, but the inflation data has flipped the script," said Sarah Lin, markets analyst at Edgen. "The market is now pricing in a higher probability of a September rate cut, which is negative for the dollar and positive for sterling."
The catalyst for the dollar's slide was a string of softer-than-expected US inflation prints. June CPI came in below consensus on Wednesday, followed by producer prices that posted their largest monthly decline in 14 months — falling 0.2% versus expectations for a 0.1% gain. Core retail sales also missed, dropping 0.2% in June against forecasts for no change.
The dollar index slipped to $101.07, near its lowest level in a month, after testing the 0.618 Fibonacci retracement near 100.31 on the four-hour chart. The 10-year Treasury yield fell 8 basis points to 4.59% as traders trimmed bets on further Fed tightening.
EUR/USD held near 1.1455 on Thursday, little changed on the session after touching a one-month high above 1.1470 earlier in the week. The euro has gained 1.3% over the past month as the dollar weakened, though gains have been capped by rising energy costs and uneven euro-zone growth. Italian CPI eased to 3.0% year-on-year in June from 3.2%, while the euro zone's trade deficit widened to 7.8 billion euros in May, well below the 2.8 billion surplus consensus.
The dollar's decline has been broad-based, with the greenback losing ground against all major G-10 currencies this week. The Japanese yen held near 162.25 per dollar, while the Swiss franc strengthened to 0.8076 per dollar.
For sterling, the next test lies at the July high near 1.3580, a level that coincides with the 200-day moving average. A break above that could open the door to the 1.3700 area, where the pair traded in early June before the selloff. On the downside, the 1.3400 level now serves as near-term support, with the 1.3143 Fibonacci level acting as the key floor.
The outlook for the dollar hinges on the Federal Reserve's next policy meeting on July 29-30. Markets are pricing in a 45% probability of a quarter-point rate cut by September, up from 30% before the CPI release, according to CME FedWatch data. UBS said it sees dollar dips as buying opportunities, citing Fed and oil price risks.
This article is for informational purposes only and does not constitute investment advice.
