• Financial market mood suffers after ISM and PMI data on soft services
• The Fed is shifting to inflation as growth may slow.
• Minutes of the June FOMC meeting may support bearish EUR/USD set-up

Yesterday's surge in the anti-risk US Dollar, Japanese Yen and their major counterparts saw stocks and Treasury yields decline. This was due to disappointing ISM service sector surveys and downward revisions of June US Markit PMI data.

These results showed that the pace at which economic activity was occurring in the largest part of the world's largest economy slowed significantly more than predicted by economists last month. The ISM report's internals echoed a disturbing trend elsewhere: lower growth and buoyant markets.

Fed officials face a difficult task in delivering on their dual mandate to ensure maximum employment and price stability. The central bank was a proponent of expansion, which allowed price growth to heat up as the economy recovered from the Covid-19 pandemic.

This may be changing. The latest ISM report, while it is one of a number of indicators that suggests growth is slowing after the crisis-induced surge in economic activity, is still high. Yesterday's services ISM reading of 60.1 was well above the trend average of 55.6. It was not surprising in comparison to baseline forecasts.

The ISM price growth index recorded 79.5 in June, just a little lower than the 80.6 record in May (16-years ago). The trend average is much lower at 57.9. The Fed might consider runaway inflation a higher priority, despite its tendency toward fiscal stimulus that is still in place to support growth.

FOMC MINUTES FLAG HAWKISH POLICY PIIVOT MAY RESULT IN US DOLLAR RISE

This could be revealed by the release of minutes from the historic FOMC meeting in June. Officials made a hawkish turn. They realized that the price growth was higher than expected and included previously unadopted rate increases into the 3-year outlook.

A steady stream of comments by US central bankers since then has indicated that they favor raising rates next year. Traders have noticed: Fed Funds futures reflect at least one increase in 2022, and two additional increases in 2023. Through 2025, tightening will continue at 100bps

Although it's not "hawkish" in absolute terms this is still a significant relative shift for a central banking that seemed to have plenty of excuses for delaying the withdrawal of stimulus. Markets may be concerned about tightening as growth slows down, and this could be confirmed in kind in the Minutes documents.

If that is the case, the US Dollar will likely rise due to a shift in relative yield prospects and haven demand. The Yen could continue to rise, with risk-off flows exacerbated by a favorable backdrop.

EUR/USD TECHNICAL Analysis - EURO SUPPORT EXPOSES 2021

This backdrop could help to realize bearish EUR/USD technical cues. After prices closed below support at 1.1836 on May 26, the Euro could resume its downward trend against the US Dollar. Keep an eye out for the 2021 swing low at 1.1704.

Positive RSI divergence suggests that bearish momentum has ebbed. Although this may indicate slower downward progress than the mid-June plunge it does not necessarily suggest that a bullish reversal could be in the offing.

In order to neutralize immediate selling pressure, it is necessary that the market reverses above 1.1860 (the June 18 close). The 1.1952-90 area is the next level of substantial resistance. Any upward movement that fails to overcome this barrier is likely to be corrective.