The Fed week is unlikely to be as turbulent as the last week which featured the ECB meeting as the risk of surprising policy decisions at Wednesday meeting appears to be low. Chances of a “super-aggressive” 100bp rate hike decline as incoming data for July point to both increased preconditions for a slowdown in headline inflation (lower gasoline prices) and a smaller-than-expected damaging effect of high inflation on consumption (retail sales +1% MoM in June). The consensus forecast suggests that the Fed will raise rates by 75 bp. The decision of the ECB to limit the forecast horizon of its policy actions to one meeting (moving away from forward guidance), means that EURUSD will now be more sensitive to incoming data and this week's EU CPI may cause higher-than-usual volatility.

After consolidating in the 106.50-107 range last week, the dollar index (DXY) drifts towards 106 points on Monday thanks to increased demand for risk. European indices trade in positive territory, US bond yields rise across all maturities, German and British bonds are moderately declining in price. Market optimism rose on the news that Gazprom will supply gas to European customers in “corresponding volumes”, which, firstly, became a signal of reduced geopolitical risks, and secondly, helped investors to revise EU growth outlook towards a more optimistic one.

Despite the low potential for surprises, the fact that the Fed intends to raise rates proactively should provide support for the dollar in August-September. In addition, the odds that the ECB and the Bank of England will revise the interest rate path towards fewer rate hikes are higher than those of the Fed.

Recession fears are likely to further curb the rally in risk assets and also offer support to the dollar. Other potential drivers of the currency market this week include releases such as the US GDP for the second quarter (consensus forecast 0.5%). The report is likely to have a short-term impact on the market, as it is unlikely to change the stance of the Fed, which is ready to pay a high price to return inflation to a comfortable path.

The heightened reaction of the EURUSD to the PMI reports on Friday (which proved to be quite pessimistic, especially for the German economy) indicates increasing sensitivity of the Euro to incoming data as the ECB decided to abandon forward guidance, shifting the focus of investors to other data sources such as macro and corporate reports. Today the report on the business climate in Germany from the IFO agency was released, which did not live up to expectations - the main reading was 88.6 points against 90.2 forecast. On Friday, data on inflation in the Eurozone is due, headline inflation is expected to accelerate from 8.6% to 8.7%, core inflation - from 3.7% to 3.8%.

Market expectations on the ECB policy appear too hawkish and incoming macro data on the Eurozone economy creates the risk of correction of these expectations in favor of more moderate ones. The consequence of this is higher risk for the EURUSD to test parity again than to rise to 1.04-1.05: