On Thursday (July 30) during Asian trading hours, the euro retreated slightly against the dollar after two consecutive days of strong rebounds, trading around 1.1440. The market took a breather after the Fed's decision, with focus now shifting to the German inflation data to be released later – which could be the next catalyst for the euro's short-term direction.

German inflation data may become a short-term catalyst for the euro.

The market is highly focused on the German July HICP preliminary reading, due on Thursday. The market widely expects the overall HICP annual rate to accelerate to 2.8% from 2.4% in June, while the monthly rate is expected to rebound sharply from -0.2% to 0.8%. If the final data exceeds expectations, it will significantly strengthen market pricing in a further rate hike by the European Central Bank in September – traders currently price a September rate hike at approximately 95%. On the same day, investors will also closely watch the preliminary second-quarter GDP data for Germany and the Eurozone to assess whether the economic recovery momentum is sufficient to support the central bank's continued tightening stance. Overall, the performance of Eurozone inflation and growth data will directly determine whether the euro's recent rebound can continue. If inflation exceeds expectations and GDP performance is robust, the euro is expected to gain further upward momentum; conversely, weak data may suppress the euro and trigger profit-taking. Short-term exchange rate volatility may increase significantly, with the data results being a key catalyst.

The Federal Reserve held rates steady but warned of inflation risks.

On Wednesday, the Federal Reserve kept the federal funds rate unchanged at 3.50%-3.75% for the fifth consecutive time, in line with market expectations. However, three hawkish members voted against the decision, indicating a clear division within the Fed regarding its policy stance. Warsh explicitly stated that the Fed would "not waver in achieving its 2% inflation target" and emphasized that it would "not hesitate to act," highlighting the Fed's high level of vigilance regarding upside risks to inflation. This series of warnings and hawkish rhetoric provided potential support for the dollar in the medium term, reinforcing market expectations that the Fed might further tighten policy if necessary. However, the market has already fully priced in the "hawks holding firm" signal. Following the announcement, the dollar came under short-term pressure and fell, while the euro rose, reflecting investors' belief that the Fed is unlikely to make a substantial policy shift in the short term. Overall, while the inflation risk warnings laid the groundwork for medium-term support for the dollar, short-term market sentiment is more inclined to digest the "no change" result, giving the euro a rebound momentum. Going forward, close attention should be paid to inflation data and official statements to determine the next direction of the dollar and the euro.

Euro awaits directional catalyst

German inflation data could be a catalyst for the euro's short-term direction—stronger data could see the euro break through recent resistance and head towards higher targets; weaker data could see the euro retest short-term moving average support. The Fed's hawkish stance has provided medium-term support for the dollar, but the market has already fully priced this in, and the euro's rebound momentum is building. (Euro/USD daily chart, source: FX678) At 14:39 Beijing time on July 30, the euro was trading at 1.1448/49 against the US dollar.