Euro managed to stay at the 21st figure, while pound moved above 1.4070, which gave it a slight advantage ahead of the Fed policy meeting.
Today is the very day that the Federal Reserve is approaching the beginning of a long journey to normalize its relations with the rest of Washington and Wall Street. However, it is unclear whether managers will agree to change the volume of bond purchases, or will prefer to wait for new data on inflation and the labor market. The second option is more likely to happen, so any inconsistencies or specifics on this issue can lead to a serious surge in market volatility this afternoon.
Over the past year and a half, the Fed has been providing unprecedented assistance to the government by purchasing bonds. But at any time, the committee may decide to reduce it, if not completely end the program. Even so, at the meeting last month, Fed Chairman Jerome Powell said that before making changes to the current monetary policy, they will notify the market of their actions to avoid excessive volatility. Hence, it is likely that they will give signals during this two-day monetary policy meeting.
And given the latest inflation data, there is a chance that the central bank will reconsider its dovish stance and raise interest rates at an earlier date. But with regards to bond purchases, it will remain at its current volume, at least until August or September this year.
Some analysts, however, still hold on to the March forecast of the Fed that rates will hike only by 2024. This means that bond purchases will not ease yet, although a Bloomberg survey said 33% of analysts surveyed expect the Fed to cut its current monthly bond purchases by $ 120 billion at the end of August. About 33% think it will be in September. The second reduction is expected in December 2021.
Since March 2020, the Fed has purchased more than $ 2.5 trillion in Treasury bonds, effectively covering more than half of government spending during that time. The purchases flooded the financial markets with liquidity, fueling the endless growth of US stocks. Sadly, this also eroded the position of dollar, but did not cause any damage to the global currency.
Considering this, the decision of the central bank will be very tricky because on the one hand, delaying the changes could lead to more inflationary pressures, while on the other hand, changing the policy much earlier than scheduled may cause economic growth to stall, which in the future could lead to another recession and financial crisis.
Fed officials have repeatedly said that they want to see "substantial progress" first before cutting back on monthly bond purchases. And until now, no one has indicated that US is close to meeting the target levels.
With regards to the Eurozone, a rather moderate inflation was observed in key EU countries. For example, harmonized inflation in Germany accelerated to its highest level in nearly three years, shooting to 2.4% year-on-year in May. Headline inflation also jumped to its highest level since September 2011, thanks to the 10% growth in energy prices. Excluding energy and food prices, core inflation rose 1.8%. On a monthly basis, CPI climbed 0.3%.
In France, inflation accelerated to a 15-month high, having jumped by 1.4%. Growth was mainly driven by the 11.7% increase in energy prices. On a monthly basis, consumer prices rose 0.3%.
Similarly, CPI also climbed in Italy, but by 1.3% year-on-year. Meanwhile, core inflation fell to 0.2%.
Going back to US, retail sales in May fell more than expected. It dropped by 1.3%, instead of the projected 0.8%. Excluding auto and parts sales, retail sales declined 0.7%.
Contrarily, producer prices rose 0.8%, which is higher than the forecasts of analysts. Even the core index, which does not take into account food and energy prices, climbed 0.7%. All in all, PPI this May is 6.6% higher than last year.
In any case, EUR / USD remained within the horizontal channel, but today it may break out of it because of the Fed meeting. Therefore, bullish traders must protect the bottom of the 21st figure, otherwise, euro will decline towards 1.2060 and 1.2020. If they succeed, euro will have a chance to increase to 1.2145, and then to 1.2190 and 1.2225. It may also hit 1.2250.
GBP
Pound dropped amid the latest data on UK unemployment, but later on pulled back above 1.4070.
According to the Office for National Statistics, the unemployment rate over the past three months fell by 0.3%, while employment rose to 75.2%. This suggests that the vaccination program is successful in helping the UK labor market recover. The annual growth in the average salary of employees also continued.
Surprisingly, pound dropped on this news, but later on rose again above 1.4070, where a lot depends today. Going above the level will set off a large upward correction towards 1.4130 and 1.4160, while dropping below it will result in a decline towards 1.4035 and 1.4000.
