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Forex Traiding

while the dollar could knock down Jerome Powell’s congressional speech, the euro risks being squeezed again


Usually, the growth of inflation in a particular country puts pressure on the exchange rate of the national currency, but this rule does not apply to the dollar. The US data released yesterday showed that in June the consumer price index in the country reached a 12-year high of 5.4%. At the same time, the base indicator was 4.5%, which has not been observed since 1991. However, instead of weakening amid the release of these data, the greenback has strengthened sharply against its main competitors, including the euro. The fact is that the surge in inflation in the US has spurred fears about an earlier tightening of monetary policy by the FRS, which has been signaled by the representatives of the Central Bank so far. The derivatives market already quotes a 90% probability of a federal funds rate hike in December 2022. “Another, higher than expected, consumer price index in the US has made the market wonder whether the rise in inflation will be temporary or longer,” strategists at National Australia Bank said. “The market appeared to have a hawkish interpretation of the June US inflation report, pushing back expectations of a Fed interest rate hike to the end of 2022, which led to a broad rally in the dollar,” they added. The increase in the yield on long-term US government bonds also supported the greenback. The figure for 10-year Treasuries rose to 1.42% yesterday from 1.36% recorded a day earlier. Analysts attributed this to concerns about inflation. Another driver of growth in yields on long-term US debt was the fact that the demand for 30-year bonds at the auction on Tuesday turned out to be disappointing. The upward momentum for the USD has weakened somewhat after investors delved into the details of the US inflation report. The spike in consumer prices was mainly driven by higher prices for used cars and higher air fares, confirming the Fed’s theory of temporary price increases. Most Fed officials believe that US inflation will drop to 2% over the next two years. According to the head of the Federal Reserve Bank of San Francisco Mary Daly, the rise in consumer prices in June was expected. “I really think this is a temporary phenomenon. The increase in inflation is mainly due to factors caused by the consequences of the COVID-19 pandemic, ”she said. “It’s premature to talk about an increase in the Fed’s interest rate,” added M. Daly, however, she noted that it makes sense for the regulator to discuss the issue of a gradual reduction in the volume of asset repurchases, which currently amount to $ 120 billion a month. President of the Federal Reserve Bank of St. Louis, James Bullard, in turn, said that he was ready to start slowing down the rate of redemption of bonds by the Central Bank, if his colleagues deem it necessary, fearing, in particular, the risk of overheating of the US real estate market. “I think with the 7% growth in the US economy and the ever-increasing control over the pandemic, it’s time to wind down the emergency measures,” he said. Now traders are waiting for Fed Chairman Jerome Powell to speak to Congress on Wednesday and Thursday. His comments will determine the further dynamics of the dollar. “The tone of J. Powell’s remarks will turn out to be tougher after the release of US data, which reflected the country’s CPI growth at the fastest pace since August 2008. However, the head of the American Central Bank is likely to refrain from disclosing details, which will negatively affect the USD exchange rate, ”UniCredit experts say. The statements of the head of the FRS about a temporary increase in consumer prices are also capable of knocking down the dollar. In addition, J. Powell can once again remind that millions of Americans are still out of work and that significant progress is needed in this direction to curtail monetary stimuli. The more contagious variant of COVID-19 Delta has already reached the American coast and caused an increase in the number of infected in the country. This is another reason justifying the Fed’s wait and see attitude. According to some estimates, the number of cases of coronavirus in the United States has increased by about 94% over the past two weeks. If new restrictions are introduced, people’s behavior can change in such a way as to reduce employment and inflation. If J. Powell marks this fact as a risk that may delay the reduction of asset purchases by the Fed, the dollar may fall. In anticipation of the speech of the head of the American Central Bank, the USD index slightly retreated from the three-month highs, noted earlier in the area of ​​92.80 points. “It is possible that we are in the final stage of the cyclical decline in the US dollar, which began in April 2020, but we are still not sure if the turning point has already been reached,” said strategists at HSBC. According to experts, the development of a short-term downward impulse for the US currency looks quite likely. In this case, close attention should be paid to the 200-day moving average, which is now passing near 91.40 points. A confident breakout of this level will open the way for the bears to 89.60 (the lower border of the narrowing trading range). Meanwhile, the Fed’s gradual movement towards curtailing monetary stimulus and the steady growth of the US economy will leave a bullish scenario for the USD on the table. In this case, the greenback will attract buyers again when the pullback to the 200-day moving average. The absorption of the July highs around 92.85 will clear the way for the bulls to 93.00 and further to 93.50 (the annual peaks noted in late March). Taking advantage of the pause in the dollar’s gains, the EUR / USD pair was able to regain some of its recent losses, rising above 1.1800. However, as soon as the dust settles after John Powell’s speech in Congress, the focus of investors’ attention will again shift to the COVID-19 Delta strain, which is already confidently marching in the Netherlands, Spain and Portugal, Germany and France are next. This could put pressure on the euro, while the dollar strengthens amid increased demand for safe assets. The divergence in the rates of the European and American Central Banks will also play against the single currency. While the Fed is already discussing when it is advisable to cut monthly bond purchases, there are not so many “hawks” among the ECB leadership, and the current position of the regulator looks more like a compromise between supporters of monetary expansion and their opponents. In addition, inflation in the EU is growing at a slower pace than in the United States. This allows the ECB not to rush to phase out QE. As the head of the ECB Christine Lagarde said this week, the new strategy of the regulator gives him the opportunity to be flexible in relation to the inflation target of 2%. “We recognize that 2% is not a ceiling: prices can fluctuate around this level. We assume that a moderate excess of the 2% mark may be temporary. The use of the term “sustainable” is an indication that monetary tightening cannot start prematurely as it has in the past, ”she said. The main currency pair was able to recover somewhat after it tested the short-term support line for 2020-2021 at 1.1777. Attempts to grow EUR / USD should contain the area of ​​1.1880-1.1945, strategists at Commerzbank note. “The pair will need to move above the 200-day moving average at 1.2006 to regain its bullish sentiment. Below the July low at 1.1772, support is at 1.1762-1.1738 and 1.1704, ”they said. – Source: InstaForex


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