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The recent events clearly show the emergence of an uncertainty state amid the multi-directional, contradictory factors. These actually counterbalance each other from declining, but also from rising stock indices. In terms of the currency market, the position of the US dollar was seen strengthening.
After the Fed's March meeting, financial markets, or rather stock markets and commodity markets, are in a consolidation stage on a wave of high volatility. This is primarily due to the statements of the Fed Chairman, J. Powell, which stated that the regulator expects a sharp inflation growth in the next few months in the wake of a strong economic recovery in the United States. All this happened in view of active sales in the government debt market, with a simultaneous growth in government bond yields.
In fact, it can be said that expectations of a recovery in the growth of the US economy, stimulated by unprecedented support measures, are the reasons why inflation is rising. The first signals of which have already appeared. Investors are well aware that the Fed began to expect a rate hike next year, despite its statements that it is not going to change the monetary rate until 2023. At the same time, history has repeatedly shown that the Central Bank will always act in accordance with its mandate. In this case, the Fed, even with a huge desire to support economic growth, will be forced to lower the volume of purchases of government bonds, and then raise interest rates against the background of rising inflation, and even more so, if it settles above the key 2.0% target or higher. On Tuesday, the CEO of the Federal Reserve Bank of Dallas R. Kaplan directly said that he expects rates to be raised in 2022.
There is no doubt that such news negatively affects the demand for company shares, and restrains the price growth for commodity and raw assets, which is increasing due to two reasons – expectations of a strong recovery in demand in the post-pandemic period and the huge dollar liquidity infused by the United States into the financial system.
Who will take the advantage for such a scenario?
The US dollar will clearly be in favor. The recent speeches of J. Powell and J. Yellen at the hearings in Congress have only strengthened this probability. We believe that if the publication of the US core personal consumption expenditure index data, as well as the values of real consumer spending, show growth, it will only strengthen the market's view that a sharp growth in inflation is approaching. This may put pressure on the stock indexes again, but at the same time, support the US dollar.
Forecast of the day:
The EUR/USD pair continues to be under pressure amid the US dollar's strengthening. It is trading below the level of 1.1835. If the US statistics show an increase in the expectations for inflation growth, the pair will most likely decline further to the level of 1.1750.
The GBP/USD pair is trading above the level of 1.3670. Its downward movement will likely continue. We consider it possible to sell it on the wave of positive data for the US dollar, with a likely decline to 1.3560.
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