Market situation July 27 – if not TACO, then FED
Nevertheless, the market is reacting to facts and "inflated" oil prices have taken a strong discount. This has provided pretexts for a pullback in risky assets and a retreat of the dollar. Its declines are not that significant – currently the strongest among the G‑10 are the Scandinavian crowns with returns not exceeding 0.35%.
Investors quickly shifted from TACO to the narrative around the FED in the context of the July 28‑29 meeting.
On the upcoming Wednesday we will not see a rate hike, but the fact that the market still offers over 30% chances of tightening may cause the FED to likely submit such a proposal for a vote and a few members of the FED to support it – if Warsh mentioned it during a press conference it would have a "thunderous" effect for the dollar and other assets, as it would be a very clear signal that in September such a hike will most likely be approved.
As a result, it should not be surprising that the dollar quickly recovers today's losses and by the end of the week we could be significantly higher than we were last Friday.
EURUSD – above 1.14 will not last long...
On the TACO wave the dollar lost, and EURUSD breached the 1.14 barrier it broke last week.
Prices reached 1.1417, where the upward trend line ran and reversed by falling below 1.14. Is this a classic retracement pattern, suggesting declines in the coming days?
Such a scenario seems to be suggested by fundamentals – the "hawkish" FED argument – although daily indicators would likely favor mild declines in EURUSD.
Either way, testing the June low at 1.1324 remains a fairly likely scenario for this week.
Daily EURUSD chart
The German Ifo index fell in July slightly better than forecast, rising to 86.6 points, but this does not change the scenario outlined above.
