The ECB’s president found the right words to reprove EURUSD bulls while investors stayed calm amid CPI growth to 5% and core inflation’s rise to its highest since 1992. Let’s discuss that and make a trading plan.
Weekly fundamental forecast for euro
The market’s reaction to US consumer prices’ fastest growth in more than12 years proved that investors trust the Fed. S&P 500’s another record high and a collapse of 10-year bond yields to a 3-month trough contradict a belief that markets felt frightened of 5% inflation. If they had felt so, the stock index and treasury rates’ evolution would’ve been different. The Fed will soon start to discuss QE tapering, indeed, and then reduce the asset-buying program, but it’ll do it at a very slow pace. So, there’s no reason to get nervous.
Weekly yields on 10-year treasuries
When an economy is sick, stimuli are a good prescription, but they should be canceled once a recovery has started. Fiscal support leads to the labor market’s imbalance: encouraged with stimulus checks, the Americans aren’t rushing back to work, and employment is recovering slower than GDP. The Fed’s cheap money heats demand but cannot directly impact on the supply of services. As a result, inflation is getting faster.
Such imbalance might become a disaster unless QE and extra fiscal stimuli are tapered: high inflation will become a habitual and long-life factor. I hope the Fed won’t let that happen, or else it will have to “take the foot off the accelerator” by raising rates aggressively. Besides the economy, that will hit financial markets as well.
So, the US also has its weak spots even if GDP is rising rapidly. Still, its economy has looked better than the European one so far. Emphasizing that fact, Christine Lagarde accomplished her mission and cooled down EURUSD bulls. Even if the ECB upgraded GDP forecasts from 4% to 4.6% in 2021 and from 4.1% to 4.7% in 2022 and expects that inflation will rise 1.9% and 1.5% this and next year (+1.5% and +1.2% upgrade), Lagarde mentioned that the European economic recovery fell behind the US. So, the Governing Council hasn’t discussed QE tapering while the Fed plans to do that.
According to Bloomberg’s insider, bond-buying volumes were discussed at June’s meeting. Some of the ECB representatives proposed that the volumes be increased in June-July as an inert market would force the ECB to reduce activities in August. Others said the ECB didn’t have to buy as much as now to preserve favorable financial conditions during the period of holidays and low liquidity.
ECB bond-buying dynamics
Weekly trading plan for EURUSD
Thus, high inflation didn’t frighten markets, and Christine Lagarde accomplished her mission. Everybody is happy. Investors switched focus to the FOMC’s meeting, and the EURUSD continues hanging around 1.212-1.222. We only have to use intraday trading strategies, wait for a breakout, and find comfort hoping that a fast exit follows long consolidation.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.