Euro and pound traded within a horizontal channel on Wednesday, ahead of the Fed policy meeting. But after the central bank announced that it will raise rates earlier than scheduled, demand for dollar rose sharply, which pushed euro and pound down.
But until then, interest rates will remain the same, as will the volume of bond purchases. The Federal Reserve stressed that they will not reduce their purchases until there is "significant progress" in achieving the set goals.
In terms of inflation, no major changes were observed. Even so, the central bank believes that growth will be short-lived, and that it will return to 2% some time this year.
Meanwhile, economic activity and employment indicators have improved greatly, thanks to the successful vaccination programs. In line with this, Fed forecasts GDP to grow by 2.4% this year, up from the 2.2% projection in March. Core inflation is also expected to climb by 2.1% in 2023, and then return to an acceptable level. These forecasts have led some Fed officials to say that rates may increase as early as 2022, although what the Fed announced officially is an increase to 0.6% in 2023.
In the press conference, Fed Chairman Jerome Powell said the US economy is improving greatly, so the policy meeting earlier can be considered as "a starting point for changes in monetary policy." Hence, officials will soon discuss when the central bank can begin cutting back bond purchases, which, during the recent crisis, helped support financial markets and the economy.
As for the Eurozone, latest reports say labor costs continued to increase in the first quarter, albeit a little slower compared to the fourth quarter of 2020. This reflects the problematic moments in the labor market, which were observed in the past months. Eurostat said hourly wages increased by 1.5%, while cost of wages (per hour) rose 2.2%. As for the non-labor component, the data declined by 0.9%.
Some economies also grew at a slower pace, mainly due to severe supply chain disruptions. Germany, for instance, recorded a GDP growth of only 3.3%, slightly lower than the expected 3.7%. On the bright side, the forecast for 2022 is revised to 4.3%, thanks to the significant decrease in COVID-19 infections brought by mass vaccinations. The lifting of existing economic restrictions also affects recovery positively, so the unemployment rate is expected to average 5.8% in 2021, and then to 5.2% in 2022.
Going back to US, the number of new homes jumped by 3.6% in May, increasing to 1.572 million. However, the number of building permits fell by 3.0%, declining to 1.681 million.
In terms of inflation, import prices rose more-than-expected, more specifically by 1.1%. Analysts had expected the figure to climb by only 0.8%.
All this led euro to reach 1.1986, where a lot depends today. Going below this level will lead to a further drop to 1.1955 and 1.1925, while an increase above it will result in a jump to 1.2030 or 1.2065.
GBP
Pound tried to increase on Wednesday amid better-than-expected data on UK inflation, but the announcement of the Federal Reserve offset it. According to the latest report, UK CPI jumped 2.1% in May, which is much higher than the projected 1.8%. Core inflation also rose to 2.0%, instead of only 1.5%.
Meanwhile, home prices rose a bit slower than the previous month. It climbed by only 8.9%, while in March it jumped by 9.9%. The average home price in UK is £ 251,000.
All this made pound trade sideways, but today a lot depends on 1.3970 because a break below it will set off a dive towards 1.3920 and 1.3870. Considering this, the best option is to sell the currency from 1.4020 and 1.4060.
