Fed Chairman Jerome Powell has put the dollar bulls in place again, moderating their ambitions and appetites. After voicing "dovish" rhetoric in the Congress, he put pressure on the US dollar and, accordingly, abolished the downward momentum for the EUR/USD pair. Buyers managed to organize a correction by pulling this instrument from the level of 1.17, but the upward momentum also turned out to be temporary – the EUR/USD bulls began to fix profits towards the end of the US session on Wednesday. After that, the pair drifted around the middle of the 1.18 mark. In general, Powell brought the pair back into the multi-week range of 1.1780-1.1900, killing the confidence of dollar bulls with his pessimistic words.
But despite yesterday's events in Congress, it can be assumed that the US dollar only lost one round, but not the whole battle. Therefore, the main battles on the EUR/USD pair are still ahead.
The rhetoric of the head of the Fed was predictable. There was no miracle: Powell actually repeated the same theses that he said in Congress at the end of June despite a three-month record increase in inflation. Their essence comes down to the fact that the inflation growth is temporary, the US economy still needs incentives, and the US labor market is still far from perfect since it differs by 8 million jobs from its pre-pandemic level. Powell's conclusions were self-evident: "There is no reason to rush into any tightening of monetary policy."
The market partially agreed with the Fed Chairman. The US dollar left its local highs but did not further plunge, reacting to Powell's clearly "dovish" remarks. In my opinion, such stress resistance of the US dollar is explained by several reasons.
First, Jerome Powell cannot make individuals decisions for the Fed despite his political importance. It was already known that all key issues about the monetary are resolved by Fed members collectively. Here, it should be noted that not all members of the regulator share the position of their CEO. Some of them are still worried about the abrupt rise in inflation and the impact of QE on some sectors of the economy. For example, the head of the Federal Reserve Bank of St. Louis, James Bullard, recently called on the Fed to stop buying mortgage bonds. According to him, the acquisition by the regulator of these securities helps to reduce the cost of mortgage loans and, accordingly, inflates the "bubble" in the housing market.
Second, it will be difficult for the Federal Reserve to ignore the record growth in inflation if this trend continues further. There is a high probability of such a scenario, given some indirect signs. According to several analysts, the current price increase is mainly occurring in fairly narrow categories, but there are numerous signs that the list of these categories may expand – especially in the light of the weakening of quarantine restrictions. In addition, massive fiscal and incentive programs have led to the formation of a "savings bubble". It can be recalled Bloomberg's spring report. According to it, consumers around the world have accumulated $ 2 trillion 900 billion during periods of lockdowns and quarantine restrictions. At the same time, about half of these funds, that is, about $1.5 trillion were accumulated directly by American consumers. According to those surveyed by Bloomberg, they will begin to actively spend their accumulated funds on goods and services in the second half of the year, thereby provoking inflationary growth.
Considering the latest inflationary releases, the above forecast scenario began to be implemented at the end of spring. Experts point to strong domestic demand amid the limited supply and a shortage of some goods due to supply disruptions. All this leads to an increase in prices. Americans are actively spending their accumulated funds, and in many cases, demand exceeds supply, which is why the inflationary spiral is spinning stronger and stronger. In addition, the shortage of employees in a number of sectors of the economy forces employers to raise wages, which also contributes to the acceleration of inflation.
In other words, the recent inflation data reflect the rise in prices for a wide variety of goods and services, including housing rents. This means that the US economy could hypothetically be close to overheating if the Fed does not respond. Some currency strategists voiced such a position. In particular, the conglomerate Goldman Sachs. They reported last week that the Fed will announce QE, if not in November, then in December, that is, at the final this year's meeting.
Summarizing the above, it can be concluded that it is too early to cancel the US currency since even the split in the Fed camp can provide significant support to EUR/USD sellers, especially amid a slowdown in the inflation rate in the EU and the predominance of "dovish" sentiment among the European Central Bank's members. Given this fundamental picture, the current upward correction of the EUR/USD pair can be used to open short positions to the base of the 1.18 mark.
