07.06.202111:18 Forex Analysis & Reviews: Yellen's statement to see higher interest rates supports the US dollar

Last week was generally positive for the global stock markets. The major stock markets showed that only China ended the first week of summer in a negative zone, while Europe and the US closed with moderate gains.

The mood on the world markets has slightly improved, which was demonstrated by the dynamics of the stock indices. However, we cannot say that everything is extremely good. Investors continue to take in the incoming mixed economic statistics from the US.

The presented values of the PMI in the services sector came out higher than expected – 70.4 points in May against 64.7 in April. We are also pleased with the figures of PMI for the non-manufacturing sector – there was growth to 64.0 points last month compared to the previous period under review, that is, at 62.7 points in April. The markets were even initially pleased with the data on the number of new jobs from the ADP, which showed a strong increase of 978,000 against 654,000 a month earlier.

However, there is one problem that remains very noticeable in terms of its importance and influence on the markets. The official figures for the number of new jobs in May were significantly lower than all expectations – 559,000 against the consensus forecast of 650,000. Many even hoped that the number would rise by 800,000, but neither these nor other hopes were justified. The US economy is still showing weak dynamics in the labor market, and hence one should not expect that economic growth will be strong. According to the presented employment data, Americans are not in a rush to go to work, continuing to lead a "parasitic" lifestyle, receiving subsidized assistance from the government. We have previously discussed this issue in detail and its impact on economic recovery in the post-pandemic period.

Against this background, it is difficult to expect a resumption of strong growth in demand for company shares, which means that there is strong growth in stock indices everywhere, not only in the United States but also in the whole world. Actually, individual securities will grow and not bad, namely those that have suffered too much from the COVID-19 pandemic.

Another event that happened this weekend could upset investors. This is a statement by US Treasury Secretary J. Yellen, who was the Fed's Former Head under Barack Obama. She said in an interview with Bloomberg News that President Biden's plan will include spending about $ 400 billion a year, which, in her opinion, is not enough to cause excessive inflation. She also added that it would be a big plus if interest rates were higher by the end of this year. It is worth noting that Yellen has no influence on the decisions of the Fed, but her position may reflect the changing sentiment in the entire economic bloc of America.

It is the high probability of continued inflation growth that may cause the Federal Reserve to change its position regarding the volume of government bond repurchases, and then the level of interest rates itself.

But the question arises, why are stock markets growing on the wave of these fears, and the US dollar still does not want to decline?

We believe that the situation on the labor market in the United States allows bullish investors to expect that economic growth will be weaker than expected at the beginning of this year, which means that the Fed will pull to the last and not change its monetary rate in order to stimulate economic growth.

Under these conditions of uncertainty, US stock indexes and government bond yields will try to stay at local highs, which will force the US dollar, as well as stock indexes, to consolidate for quite some time.

Forecast of the day:

The EUR/USD pair is trading below the level of 1.2175. A decline below 1.2150 will let the pair further fall to 1.2100, and then to 1.2050.

The GBP/USD pair is trading in the range of 1.4100-1.4235. If the price breaks below this range, it will decline to the level of 1.4000.