Investors went back to selling the US dollar after the minutes of the last FOMC meeting were released. Recession fears are snowballing through the market, fueling talk of 10-year US Treasury yields peaking at 3.2% in mid-May. Since then, debt rates have been falling for five of the last six trading sessions, depriving the USD index of a key trump card.
When GDP growth is likely to slow and inflation to ease, buyers for Treasury bonds will be easy to find. Their price moves in the opposite direction of profitability. The decrease in the latter at the beginning of the year was due to fears of an aggressive tightening of the Fed's monetary policy due to rising inflation by leaps and bounds. In April, growth in the index of personal consumption expenditures stalled, which shifted investors' attention from inflation to recession. And this is a completely different story and financial market conditions.
Dynamics of American inflation
The forecasts of the US Congressional Budget Office also speak of favorable conditions for the purchase of debt obligations. It expects US GDP to slow down from 5.5% in 2021 to 3.1% in 2022 and 2.2% in 2023. The inflation growth rate will decrease from 4.7% this year to 2.7% next year.
Such estimates by the agency suggest that, firstly, the Fed will be able to implement its plan to suppress PCE and at the same time achieve a soft landing. Secondly, by the end of 2022, price growth will slow down significantly. If this continues, Fed Chair Jerome Powell and his colleagues will have good reason to pause the monetary tightening process. The most likely scenario is a 50 bps increase in the federal funds rate in June, then another such big move in July, followed by flat borrowing costs in September.
Rumors that the Fed will want to sit on the sidelines by the end of the third quarter allowed the rival currencies of the US dollar to raise their heads. The euro has been especially successful in this. The clear plan outlined by Christine Lagarde calls for the ECB to pull the deposit rate out of negative territory at the end of September, which is hot news for financial markets. At the same time, the "hawks" of the Governing Council do not exclude its increase by 50 bps at once. at one of the meetings of the European Central Bank, which adds fuel to the fire of the EURUSD rally.
The main currency pair has a good chance of developing a correction, however, in my opinion, the upward movement of the euro has its ceiling. The EU embargo on Russian oil will deepen the energy crisis, bring back talk of stagflation in the eurozone and sell the euro.
Technically, the consolidation of EURUSD above the moving averages and the pivot point at 1.07 creates prerequisites for the continuation of the rally. There was no close of the day below 1.065, so the previous recommendation is no longer valid. A break of resistance at $1.0735 could be grounds for buying the euro.
EURUSD, Daily chart
EURUSD, Hourly chart
