Risk appetite fell on Thursday after US inflation once again threatened to break records. The scenario forced traders to take profits and bet on safe-haven assets, including the US dollar.
According to recent reports, the United States is poised to enter the new year with a booming economy despite mutating coronavirus and excessively high inflation. The already sky-high inflation is set to advance even more as the CPI data for November is expected to rise to 6.8%. That will be the highest figure recorded since the early 1980s.
Seeing inflation this high makes dollar more attractive even though CPI is projected to decline next year. But for that to happen, the Fed has to accelerate the scale back of bond purchases, as well as increase interest rates.
Economists have noted that higher prices helped businesses achieve the highest profitability since the 1950s this year, but for the Biden administration and the Federal Reserve, it was seriously traumatic.
That is why the central bank is set to make huge changes next year, especially in its monetary policy. After all, ongoing supply issues, labor market surges and consumer spending will continue to push core inflation higher. The sharp rise in energy prices this year also caused a lot of problems.
The coronavirus pandemic is to blame for all of this as it made it harder to produce and move goods. On the bright side, households were able to save more money, so it is likely that consumer spending will increase in the coming months. The labor market also improved, with the unemployment rate rapidly returning to the pre-pandemic level.
A year ago, many Fed economists predicted inflation at 2% for 2021. Fed Chairman Jerome Powell even said that the rise in inflation is temporary, but this turned out very wrong. He recently stated that the surge is no longer short-term, so the central bank will have to make more aggressive actions.
The massive support measures provided during the pandemic should also be blamed for the sharp rise in inflation because in the spring of 2020, $ 900 billion was added to the $ 2.2 trillion rescue package given in December 2020. It was followed by another $ 1.9 trillion in March, when Joe Biden rose to power. Inflation will most likely be triggered by the high costs that households can afford using strong labor markets and good wages.
Latest data have indicated that prices of sawnwood jumped 70% from early March to early May. Food prices also grew strongly over the past 12 months, by more than 27%.
The recovery in the labor market also left its mark on businesses as employers had to increase paychecks in the hope of retaining staff. They also struggled to increase the headcount fast enough to meet the growing demand.
Still, many Americans were unhappy with the actions of the US administration as Biden's latest spending plan was to complement stimulus measures to tackle Covid and increase investments in childcare and green energy. Democrats in the Congress have repeatedly pointed to government spending as the driving force behind inflation, so they were reluctant to vote to increase it. Biden also tried to fight supply problems, but his moves only pushed prices higher.
Some experts said most of the blame lies with Jerome Powell, but it is difficult to draw definite conclusions here. The main task of the central bank, no matter how paradoxical it may sound, was and is the salvation of the economy, and this can be done only through the restoration of the labor market. Now that the labor market is saved, it is time to start "slowing down" the overheated economy.
But it seems that the Fed is again out of luck because another coronavirus strain was discovered. How this will affect the labor market and the economy is still uncertain, but the plan of the central bank to cut bond purchases may be postponed.
Talking about macroeconomic statistics, Germany reported that overseas sales in October were up 3.8% from February 2020, the month before Covid-related restrictions were imposed in the country. However, in the same month, new orders for manufactured goods fell on the back of weak demand, especially from outside the eurozone. The data also indicated that Europe's largest economy is in a weak position in the last months of the year, especially with the emergence of new global restrictions related to the omicron strain.
Meanwhile, in the US, jobless claims dropped 43,000 to 184,000 during the reporting week. The four-week moving average also fell to 218,750, the lowest since March last year.
All those led to bullish activity ceasing, so EUR/USD fell to 1.1270 yesterday. There is still a chance though for buyers to push the quote back to 1.1320, however, knowing what data awaits today, one should not count on it. A breakout of 1.1270 will surely put pressure on the pair and push it to 1.1240 and 1.1190.
