Relevance up to 04:00 2022-06-13 UTC–4
At the beginning of May, the EUR/USD pair updated the 5-year price low, reaching 1.0349. If the bears had lowered the price by just 11 more points, then the 20-year price record would have been updated. To date, EUR/USD bears have every chance to approach multi-year lows again. The inflation report, which was published last Friday, enabled the dollar to once again remind itself, amid a sharp increase in hawkish expectations. Therefore, in the coming week, the pair may not only gain a foothold within the 4th figure, but also test the support level of 1.0400. In this case, the market will once again talk about the prospects of achieving parity.
The central event of the week is the Federal Reserve’s June meeting. The results of the two-day meeting will be announced on Wednesday, after which the dollar index may soar again, after falling to 101.30 at the end of May. During the previous week, the index gradually gained momentum, amid the growth of the oil market and the introduction of a state of emergency in the United States (due to a potential shortage of electricity generating capacity). Friday’s inflation report was the “last chord” that enabled EUR/USD bears to finally overcome the support level of 1.0640 (the Tenkan-sen line on D1) and decline to the base of the 5th figure.
The main message of Friday’s release is that inflation in the US does not fade in a “natural way”, contrary to the assumptions of many economists, Fed members and even Chairman Jerome Powell, who allowed the situation to turn in the second quarter. The April data on the growth of the consumer price index and PCE really reflected a slowdown in growth. But judging by the May results, inflation is still a “headache” for the Fed, the White House and ordinary Americans. Experts assumed that the CPI would continue to decline, as it was last month (from 8.5% in March to 8.3% in April). But in reality, the index added another 0.3 percentage points from the April value – up to 8.6% in May. Most of all, energy carriers have risen in price, the prices of which have increased by 34.6% year-on-year. Food prices have also risen significantly – by 10% at once. This is the strongest growth rate since March 1981. Immediately after the release of the report, the Dow Jones industrial average collapsed by almost 2.75%, reaching 31,390 points.
Now it’s up to the Fed. US inflation has already ceased to be a matter of concern only on conventional Wall Street: in the US, almost everything is becoming more expensive to one degree or another – from cinema tickets and plane tickets to clothing and medical services. The rating of US President Joe Biden and the Democratic Party is declining, and ahead of the midterm congressional elections to be held this fall (the House of Representatives and a third of senators will be re-elected in November). Preliminary polls suggest that Republicans will gain control of the Lower House of Congress.
In other words, inflation is currently the main challenge for the Fed, so the markets expect decisive action from the members of the central bank. Until last Friday, the baseline scenario was expressed in a guaranteed increase in the interest rate by 100 points (in June and July by 50 points). Further prospects looked vague, especially against the background of the minutes of the Fed’s May meeting. Members of the central bank discussed a possible pause after “several increases”.
Obviously, there is no question of any pause at the moment. After Friday’s report, many currency strategists of large banks spoke with one voice that the Fed will have to raise the rate in 50-point steps at each meeting until the end of the year. Also, some analysts do not rule out the option of a 75-point increase in July or September.
As you can see, the hawkish expectations of the market have increased significantly. Therefore, the dollar has become in high demand, following the trading principle of “buy on rumors, sell on facts.” If the members fail to meet the “expectations placed on them”, the dollar will be under pressure. By and large, dollar bulls are driving themselves into the trap of inflated expectations. With a high degree of probability, it can be assumed that before the announcement of the results of the June Fed meeting, the dollar will gain momentum, while the future prospects of the greenback will depend on Powell’s rhetoric and the main theses of the accompanying statement. In my opinion, the Fed will show maximum “hawkishness” – at least in the context of announcing 50-point increases by the end of this year. In this case, EUR/USD bears may return to the area of 5-year lows (1.0349), followed by an attempt to break through to the base of the 3rd figure.
Given the prevailing fundamental background, short positions on the EUR/USD pair are an absolute priority. It is advisable to use upward price pullbacks to open short positions at a more favorable price. In the face of the European Central Bank’s “spinelessness”, any Fed decision will be in favor of the dollar in the medium term.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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