The currency market stood still while waiting for the main event this week. Tomorrow, we will find out the results of the Fed's July meeting at the close of the US trading session. Before the announcement, the EUR/USD pair is seen trading in a narrow price range, within the range of 1.1750-1.1830. The borders of which correspond to the middle and lower lines of the Bollinger Bands indicator on the daily chart. The instrument occupied this area on July 14, that is, almost two weeks ago, following the results of Jerome Powell's speech in the US Congress. This is a remarkable fact, which suggests that the Fed chairman failed to convince the markets that the regulator kept the "dovish" position.
The soft rhetoric of the head of the Federal Reserve produced a corresponding effect in the spring when inflation was just beginning to gain momentum. However, when the consumer price index showed a record growth for the third time in a row, the scales turned in favor of "hawkish" expectations. The market concluded that it will be increasingly difficult for the regulator to justify the abrupt growth of inflation indicators only by the low base of last year. Against the background of such conclusions, some Fed members (James Bullard, Robert Kaplan, Christopher Waller) called for curtailing the stimulus program in order to reduce the risk of taking excessive risks, especially in the housing market.
In addition, some American experts are confident that the inflation growth in the United States will not fade in the second half of the year, contrary to the relevant assurances of Jerome Powell. The structure of inflation indicators suggests that the current price growth mainly occurs in fairly narrow categories. But at the same time, there are numerous signs that the list of these categories may expand – especially in light of the increased consumer activity of Americans. It should be noted that large-scale fiscal and incentive programs have led to the formation of a "savings bubble".
It can be recalled here the spring report of the Bloomberg agency. 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 were accumulated directly by Americans. 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 inflation releases, this forecast scenario began to be implemented at the end of spring. Analysts 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 demand in many cases exceeds supply, which is why the inflationary spiral is spinning stronger and stronger.
Due to this, the market was skeptical about the "dovish" rhetoric voiced by Powell. Moreover, some of his colleagues already directly admit the curtailment of QE within the framework of 2021. For example, the above-mentioned member of the Fed's board of governors, Christopher Waller, recently stated that he shares the views of Robert Kaplan and James Bullard regarding incentives. According to him, the US regulator most likely will have to start reducing the asset repurchase program this year to be able to start raising the base rate by the end of next year. It is worth noting that the Fed's median forecast, published at the June meeting, suggests that the Fed may raise the interest rate twice in 2023. However, other forecasts are increasingly being made on the market, the essence of which is to tighten monetary policy already in 2022. The above remarks of the "hawks" (Waller is not the only one who allowed the implementation of such a scenario) only spur interest in the US currency and especially in a pair with the euro, which did not receive support from the European Central Bank. ECB members approved a new strategy at the last meeting, according to which inflation may temporarily exceed the target level of the Central Bank. Experts believe that the first increase in the ECB interest rate will take place no earlier than 2024. As for the incentive program, it will be in effect at least until March 2022, although there is a high possibility that an "enhanced" APP will replace the PEPP.
In other words, even if the Fed does not decide tomorrow to announce the curtailment of QE this year, the very fact of a split in the Fed will provide significant support to the US currency (judging by the previous rhetoric, such a split is inevitable). The Euro currency, in turn, has to be content with cautious or "dovish" statements from the ECB members.
In this case, any more or less large-scale upward correction in the EUR/USD can still be used to open short positions by the middle of the 17th figure. From the technical point of view, the pair on the daily chart is located between the middle and lower lines of the Bollinger Bands indicator, as well as under all the lines of the Ichimoku indicator, which indicates the priority of the downward movement. The main support level (the downward target) is the level of 1.1750 – this is the lower line of the Bollinger Bands on the daily chart.
