Tuesday marks the start of a two-day meeting of the US Federal Reserve, with results to be announced on Wednesday, July 29. As for the formal outcomes, there is no intrigue here: the overwhelming majority of analysts believe that the central bank will keep all monetary policy parameters unchanged. This is the baseline and most anticipated scenario, which is already reflected in current prices. Therefore, all attention will be focused on the Fed's accompanying statement and the subsequent press conference by Kevin Warsh. Here, predicting the tone of the signals is much more challenging given the current fundamental backdrop.

The July meeting is taking place against a rather complex combination of fundamental factors. On one hand, the latest macroeconomic reports create the groundwork for a softer rhetoric: inflationary pressure in the US is gradually easing, the labor market is losing momentum, and economic growth is slowing relative to the high rates of last year. On the other hand, a new surge in geopolitical tension in the Middle East has again raised the risks of an energy shock (and consequently, the renewed strengthening of inflationary pressure).

Thus, the main intrigue of the July meeting lies not so much in the decision on the rate but in which of the two risks is currently more significant for the central bank: the persistence of inflationary pressure or the cooling of the US economy.

It is important to note that the recent escalation in the Middle East has significantly intensified the market's hawkish expectations regarding the Fed's further actions, including in the context of the current meeting. If immediately after the publication of the June Nonfarm Payrolls, the probability of a rate hike this month was assessed at only 8-9%; on Tuesday, that probability approached 40% (according to CME FedWatch tool data).

In my opinion, the market's hawkish expectations are overstated. This means that if the Fed maintains the monetary policy parameters unchanged and refrains from "clear" hawkish signals, the dollar will come under significant pressure.

And judging by the current macroeconomic picture, this is a fairly likely scenario.

The overall Consumer Price Index (CPI) in June decreased to -0.4% month-over-month, marking the sharpest monthly decline since the coronavirus crisis (specifically since April 2020). The annual rate in June also slowed significantly, from 4.2% to 3.5%. This dynamic was driven by a reduction in gasoline prices (-9.7% month-over-month) and stabilization of Brent prices at around $72-75 per barrel.

At the same time, the core CPI also reflected the slowing inflation: the core index showed a zero result (0.0%) month-over-month and decreased to 2.6% year-over-year.

Manufacturing inflation also demonstrated a downward trend. The overall Producer Price Index (PPI) fell to -0.3% month-over-month (after a rise of 0.6% the previous month) and slowed to 5.5% year-over-year. The key driver of this decline was the cheaper energy and fuel costs. Meanwhile, the core PPI rose only by 0.2% month-over-month, indicating a lack of secondary price shocks from raw materials.

This is an important signal, as the dynamics of production prices are one of the leading indicators of future consumer inflation developments.

However, while inflation does not yet allow the Fed to substantially soften its rhetoric (since key indicators are still far from the target level), the US labor market has recently been a factor favoring the "doves."

It is essential to remember that June's Nonfarm Payrolls (NFP) report was much weaker than forecasts. Specifically, the number of new jobs in the non-farm sector increased by only 57,000 (compared to a forecast of +110,000), while the total downward revision for the previous two months (April and May) was -74,000.

The unemployment rate in June formally decreased (from 4.3% to 4.2%), but this dynamic was due not to improvements in the labor market but to a reduction in the number of economically active citizens. The labor force participation rate dropped to 65.5%, and the share of the working-age population engaged in the labor force fell to 83.3% (from 83.9%). In other words, the "headline" figure fell only because many Americans stopped actively looking for work and thus exited the labor force. If the participation rate had remained at May's level, the statistical unemployment rate would have increased to 4.4%- 4.5%.

In short, the June NFP report does not support a hawkish stance from the Fed.

However, when assessing the further trajectory of monetary policy, the Fed will consider not only internal macroeconomic indicators but also the geopolitical context. Moreover, the Fed will evaluate the Middle Eastern factor not only through the lens of the July escalation but also taking into account the latest diplomatic signals. Yes, the new wave of tension has reminded the market of the risks of an energy shock and its potential implications for inflation and monetary policy. However, the recent cessation of mutual strikes between the US and Iran, along with signs of a return to the negotiation process, reduces the likelihood of a prolonged inflationary impulse from oil. While in spring Brent prices rose to $110-120 per barrel, current quotes are holding at $83-85 (after a short-term spike to the $100 mark).

Therefore, the central bank is likely to adopt a cautious position: on one hand, it will acknowledge the persisting geopolitical and inflationary risks, while on the other, it will not construct a scenario for tightening monetary policy based on these factors. In other words, the Fed is unlikely to signal a rate hike or hint at prioritizing such a scenario.

Given the elevated hawkish expectations of the market (it is worth noting that the likelihood of a rate hike in July is estimated at nearly 40%), such caution will exert substantial pressure on the dollar across the market.

Long positions in the EUR/USD pair should only be considered when buyers surpass the support level of 1.1410 (the middle line of the Bollinger Bands on D1, coinciding with the Tenkan-sen and Kijun-sen lines) and establish themselves above it. In this case, the next target for the upward movement will be the level of 1.1470, corresponding to the upper line of the Bollinger Bands on the same timeframe.