American inflation surged from 1.7% to 2.6% during the previous month. It provoked a prolonged weakening of the US dollar, although the markets think that inflation growth is a positive factor. This is true, but only within reasonable limits – without sharp increase and only within the target levels indicated by the monetary authorities. In principle, an acceptable inflation rate is 2.0% for the United States and Europe. Therefore, its growth at that time greatly frightened investors, as they began to fear that the Fed could raise the refinancing rate in an emergency, that is, without warning. It should be noted that neither the markets, nor the US economy, are ready for this. After that, the Fed representatives did nothing but calm the markets, relentlessly repeating their rhetoric that nothing terrible is happening, and there is no reason to panic. However, it seems that there is something to worry about. Yesterday, inflation surged to 4.2%, which clearly showed that it is not interested in the words of the members from the Federal Reserve System. So, it turns out that there are plenty of reasons to panic. However, the most surprising thing about all this is that the US dollar started to rise after it temporarily hesitated.
It turns out that all these investors and traders do not rely on real numbers, but believe the words. Such figures clearly indicate that the FRS has no choice but to urgently raise the refinancing rate, unless it does not set itself the task of preventing the collapse of the stock market even if it threatens America's economic stability. After all, the rapid growth of inflation, especially in the conditions of a fairly high level of unemployment, strongly affects ordinary citizens, who are far from all these financial markets and are the vast majority.
In general, there is a gloomy outlook. The most important thing in all this is that the vast majority of market participants rely not on facts, but on someone else's words. However, the Federal Reserve will no longer be able to ignore what is happening sooner or later, and will have to go on tightening monetary policy. This means that they have to do something in the near future that the markets are clearly not ready for, and do not plan to prepare for. Therefore, even if investors would like to prepare for this, they probably do not have time.
Inflation (United States):
But before considering those factors that further indicate the inevitability of rate hike in the US, European statistics would be worth paying attention to. In particular, the UK GDP data for the first quarter turned out to be slightly worse than forecasts. The economic downturn slowed from -7.3% to -6.1%. It seems like it's not bad, but we were waiting for a slowdown to -5.6%. The situation was corrected by the industrial production data, whose rate of decline of -3.5%, was replaced by an increase of 3.6%, which was slightly better than the forecast of 2.9%.
GDP Change (UK):
Eurozone's data on the industry still indicate a recovery, although they turned out to be slightly worse than forecasts. The decline rate of -1.8% was replaced by an increase of 10.9%, with a forecasted growth of 11.5%. The whole point here is that these data could not seriously affect the situation. The numbers are too large and not entirely enough, so it's hard to lean on them. This is due to the low base effect, due to the closure of many enterprises in the spring of last year. Nevertheless, we are talking about the restoration of the European economy.
Industrial production (Europe):
Now, let's go back to the United States and the fact that the Federal Reserve really has no choice but to raise the refinancing rate. The fact is that representatives of the US regulator can say anything, but inflation has been growing rapidly for several months and it will continue to grow. Producer prices, whose growth rate should accelerate from 4.2% to 6.1%, removed doubts about it. And since producer prices are rising, so should inflation.
In general, everything points to a further unwinding of the inflationary spiral. And even if producer prices grow at a slightly slower pace, the situation will not change. A slowdown in the growth of producer prices can only correct the situation. However, this is unlikely and logically, this should lead to a weakening of the US dollar. However, yesterday's market reaction showed that they believe words more than facts. So as long as the Fed continues to say counterintuitive things, the market will ignore the real macroeconomic data.
The data on applications for unemployment benefits will also have no effect. The scale of the changes will be more symbolic. In particular, the number of initial requests may be reduced by 47 thousand, and repeated by another 50 thousand. Given the relatively high unemployment rate, such a decline in the number of applications does not change anything at all.
Producer Price Index (United States):
The EUR/USD pair showed high activity yesterday. Thus, it was possible to see a sharp decline during the US trading session. Currently, there is a slight stagnation-pullback from the coordinate of 1.2065. If the high of the pullback is updated to 1.2088, the subsequent recovery of the price relative to the recent momentum is not excluded.
Following its European counterpart, the GBP/USD pair showed a downward activity on the market, which led to a decline towards the 1.4050 level. The subsequent price fluctuation has an amplitude of 1.4050/1.4080, where the best trading tactic is the method of breaking through a particular stagnation border.
