The morning session in the currency market saw a moderate recovery in the euro and a sharp rise in the pound against the dollar. The euro moved calmly, without much enthusiasm. The pound had a stronger reason to rise, and buyers were more confident there. The dollar weakened steadily, without any sharp declines, and in my view, this looks more like a pause ahead of the main events of the day than the beginning of a new move.
Germany, the region's largest economy, released its economic data in the morning. Unemployment remained at 6.4%, exactly as expected, so the market largely ignored the figure. Retail sales, which indicate how much consumers spend in stores, increased by 1.3% against a forecast of 2.0%. The result was almost half the expected figure, indicating that German consumers are spending cautiously. Nevertheless, the euro did not decline and even edged higher against the dollar. I will explain this as follows. The weakness in consumer spending had already been priced in, while the unemployment data did not add any negative pressure, so there was no strong reason to sell the euro.
The UK provided support for the pound. The revised estimate of GDP for the second quarter came in above forecasts, with the economy growing by 0.5% quarter-on-quarter and 1.4% year-on-year. Importantly, growth was not driven by a single sector. Both business investment and consumer spending contributed. When the economy is growing at such a steady pace, the Bank of England has more reason to raise interest rates to combat inflation, and this is how the market interpreted the data. This explains the buying in GBP/USD, and I consider this reaction justified.
The second half of the day brings three releases from the US. First will be the final estimate of second-quarter GDP. The forecast is 1.5%, and if the figure matches expectations, it will simply confirm that the US economy is growing at a moderate and steady pace. There is no surprise in such a figure, so I do not expect a strong reaction.
This will be followed by the ADP employment report. This is a private-sector report showing how many jobs were added by businesses, and it is often viewed as an indication ahead of the official labor market data. The forecast this time is 70,000. If the figure comes in significantly above expectations, the dollar could strengthen before Friday's next nonfarm payrolls release, as a strong labor market indicates a solid economy. A weak result would have the opposite effect, giving the euro and pound some room to recover.
I consider the core Personal Consumption Expenditures (PCE) price index the main event of the session. This is an inflation indicator monitored by the Federal Reserve, excluding food and energy, and it shows whether inflationary pressures within the economy are accelerating. If the increase exceeds 0.3%, risk assets could quickly reverse lower, while the euro and pound could give up their morning gains.
Cook and Barkin, members of the FOMC, the Federal Reserve committee responsible for setting interest rates, will also speak. If their tone is hawkish against the backdrop of a hot PCE reading, pressure on both pairs will increase. Therefore, I expect buyers to remain cautious through the end of the session and do not rule out the possibility that both the euro and pound will give back part of their morning gains. Until the US data are released, the market will likely remain within a narrow range.
Momentum
This strategy requires a news-driven move, and in the coming hours, the US economic calendar is the only source of such momentum.
For the euro, 1.1361 is the key level on the upside. Consolidation above this level will open the way toward 1.1386 and then 1.1410. For this scenario to develop, the dollar needs to weaken, meaning that the ADP report would have to disappoint or PCE inflation would need to come in below expectations. In my view, the tone of the second half of the day is more likely to favor the dollar, so I consider this scenario secondary. On the downside, 1.1335 is the breakout point. Confident consolidation below this level will lead toward 1.1312 and 1.1288. I consider this the main direction. A hot PCE reading or hawkish comments from Cook and Barkin would immediately put pressure on the euro, while German retail sales failed to provide it with its own source of support.
For the pound, the upside trigger is 1.3319, with targets at 1.3341 and 1.3368. The pound is in a better position than the euro in this respect because the UK GDP data already provided a reason to buy in the morning, and a move above 1.3319 looks more realistic if the US figures are not strong. However, the support from the GDP data is already reflected in the morning move, and a strong PCE reading could erase it within minutes. On the downside, 1.3280 is the key level, followed by 1.3250 and 1.3206. The second target is significantly farther away than the first, and reaching it would require a genuine reversal of the session rather than a reaction to a single release. Therefore, I would be prepared to take partial profits at the first target and look for the second only if the pressure continues to increase after the PCE release.
Mean Reversion
Here I look for a move beyond a level followed by a quick return. This approach works best when the data come in close to expectations and the market retraces after the initial reaction. This could be the case with the GDP and ADP releases if the figures are close to forecasts.
For the euro, I am watching 1.1371 on the upside. This level is ten points above the breakout point at 1.1361, and such proximity requires caution. If the price moves above 1.1361 toward 1.1371, briefly trades above it, and then quickly returns below, I would consider selling. If, however, the price reaches 1.1371 and consolidates above it, this would be a breakout, and selling would not be appropriate because the first target at 1.1386 is very close. In such a trade, I would place the stop above the 1.1371 level with a small buffer to avoid being stopped out by random market noise. On the downside, the reference level is 1.1341, just six points above the breakout level at 1.1335. The scenario is that the price moves below 1.1341, fails to hold there, and returns above it, in which case I would look for buying opportunities. Since the nature of the move cannot be determined on the first test, it would be more reasonable to skip the initial reaction in this zone. I would place the stop below 1.1335 because consolidation below this point would confirm a breakout and invalidate the return scenario.
For the pound, the upside reference level at 1.3310 is nine points below the breakout point at 1.3319, meaning that the price will encounter it first. If the pair moves above 1.3310, fails to hold there, and returns below it, I would consider selling. If, however, the price moves through the zone and consolidates around 1.3319, this would be a breakout, and I would not trade against it. It is logical to place the stop above 1.3319 because as long as the price remains above this level, the return scenario has not worked. I would be particularly cautious around the PCE release because a strong figure could push the pound through both levels without a pause. The downside reference level at 1.3256 is located between the breakout point at 1.3280 and the first target at 1.3250, which makes it significant. If the downside breakout scenario has already begun and the price reaches 1.3256, part of the move has already taken place, and a rebound from there could indicate that selling pressure is weakening. However, only six points remain to the 1.3250 target, so buying against the move there would be risky. I would place the stop below 1.3250; the risk would be limited, but so would the margin for error. If the price consolidates below this level, the next target would be 1.3206, and I would not attempt to catch a reversal there.
