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FX.co ★ Forecast for EUR/USD: Risk appetite to plummet more amid another surge in US inflation

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Forex Analysis:::2021-07-14T07:40:50

Forecast for EUR/USD: Risk appetite to plummet more amid another surge in US inflation

Euro collapsed yesterday after US reported another jump in inflation. The latest data revealed that it increased much higher than expected, further strengthening the idea that the Federal Reserve will tighten monetary policy earlier than scheduled. But after some time, the market very quickly recovered the loss, as investors began to realize that the report will not affect the stance of the central bank.

The data said US CPI rose 0.9% in June, which is much higher than the expected 0.4%. The jump occurred because US spending grew, thanks to the efforts of authorities in pulling the economy from the recent crisis. All in all, inflation has risen 5.4% over the past year, and its underlying effects continue to persist.

Forecast for EUR/USD: Risk appetite to plummet more amid another surge in US inflation

But as mentioned earlier, it is unlikely that the Fed will change its stance on monetary policy, as many members believe that the ongoing increase in inflation is temporary However, if prices decline much worse in the coming months, the central bank will be forced to act more aggressively to prevent the long-term inflation rate from going beyond 2.0%.

Analysts expect US CPI to fall to around 2.5% by the end of next year, with the core index remaining above the high of the last decade's cycle. And although disinflationary forces are clearly visible, the Fed promised that they will not allow inflation to go beyond their target level.

Forecast for EUR/USD: Risk appetite to plummet more amid another surge in US inflation

In fact, in a recent interview, San Francisco Fed President Mary Daly said that several months of inflation does not mean that it is not temporary. Daly claims that the current situation is just dominated by odious factors, such as the discovered delta strain of coronavirus, which is currently creating additional risks to the global economy.

Meanwhile in the European Union, the European Central Bank announced that they are ready to be more flexible in terms of inflation. ECB President Christine Lagarde stressed that 2% is not a ceiling, so exceeding it is allowed.

But not everyone in the central bank agrees with this position. ECB Managing Director Mario Centeno said there is a risk of losing confidence if the new ECB leadership does not show greater leeway on inflation. He also believes that the central bank needs to be very careful when deciding to end programs that support the economy

Of course, there are no talks of stopping such measures yet, even amid the massive leap in inflation. Most likely, it will be next year that the central bank will consider changing its stance on monetary policy. Recent inflation data in Germany and France have proven this, as the figures fully coincided with the forecasts of analysts. German CPI rose 0.4% in June, while annual inflation went beyond 2.0% and was to 2.3%. Meanwhile, France CPI climbed 0.2% month-over-month, and annual inflation fell short of 2.0% and inflation to 1.9%. If tobacco products are excluded, the indicator amounts to only 0.1%.

In the event that ECB ends its bond buying program, Lagarde promised that they will resort to other stimulating instruments. This means that interest rates will remain at zero levels for a very long time.

Forecast for EUR/USD: Risk appetite to plummet more amid another surge in US inflation

Going back to US, Treasury Secretary Janet Yellen said the government will resort to emergency measures if Congress does not approve the increase of debt limit by the end of July this year.

Talking about EUR/USD, it is unfortunate that despite all the efforts of buyers, pressure on risky assets returned, which led to a breakdown of several technical support levels. The only thing that holds the pair from further declining is 1.1770, so a drop below it will immediately result in a plunge towards 1.1740 and 1.1680. But if bullish traders manage to bring the quote back to the 18th figure, EUR/USD will be able to climb again to 1.1850 and 1.1905.

Analyst InstaForex
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