Recently, the main currency pair has been noticeably stormy. The reason for this is the contradictory signals from the Federal Reserve.
Although there is a hawkish shift in the central bank's rhetoric, its leadership continues to argue that it is necessary to maintain soft financial conditions for the time being.
According to a number of experts, such comments are nothing more than a smoke screen, and in September the central bank may announce that the goals it has previously set have been achieved or are being achieved.
"Most likely, we will have to wait until after the summer the position of the Federal Reserve becomes tougher, so that this significantly affects the situation," Danske Bank strategists believe.
On Friday, the dollar weakened against the euro in the Asian and European sessions, but within the framework of US trading, it managed to win back most of the losses, even at some point it went into the positive, and ended the day in a symbolic negative. At the same time, the Friday dynamics of EUR/USD looked like this: the pair started at 1.1930, rose to 1.1950 by the beginning of the European session and to 1.1975 at the start of trading on Wall Street. Then it quickly sank to 1.1926, but ended trading near 1.1935.
The US data released at the end of last week showed that the price index for personal consumption (PCE) in the country in May increased by 0.5% on a monthly basis against the projected rise of 0.6%.
"Nevertheless, the growth of the main PCE to 3.4% year-on – year in May was the biggest jump since 1992, and markets remain cautious, still fearing that the Fed may normalize policy sooner rather than later," Maybank experts noted.
Although the PCE data turned out to be softer than expected and generally corresponded to the comments that Fed Chairman Jerome Powell voiced in the first half of the week, speaking to Congress, the growth in yields of long-term US treasury bonds had a positive impact on the US currency.
Last Friday, the indicator for 10-year treasuries jumped above the 1.50% mark amid optimism about the infrastructure development financing plan announced on Thursday in the United States. This made it possible for the USD index to push off from local lows and recover above 91.70.
CBA analysts believe that the dollar will be subject to "cross currents" in the future.
"Further improvement in the state of the US economy should support the greenback. At the same time, the main risk for the USD remains that some economic indicators for the United States may not meet market expectations, and this will negatively affect the exchange rate of the US currency," they said.
The economic calendar for the United States this week is rich in events. In particular, investors will monitor the pace of employment recovery. In addition, the ISM business activity survey and consumer confidence indicators will attract the attention of market participants.
ING expects both indicators to remain at high levels, with the first reflecting that continuing supply problems are putting upward pressure on prices, and this may increase the chances that inflation will linger at high levels.
At the same time, the data on the US labor market are undoubtedly key. Economists expect an increase in the number of jobs by 675,000 people.
"Depending on the results of the US employment survey, the market may begin to assess more chances of a rate hike from the Federal Reserve next year," said strategists at Daiwa Securities.
Fed rate futures for December 2022 almost completely take into account a rate increase of 0.25 percentage points by the end of next year.
According to Powell, price pressure will subside, and the Fed will not raise rates preemptively.
Last week, the Fed chairman confirmed the central bank's commitment to a large-scale and comprehensive recovery in the labor market, adding that there is still a long way to go in this direction, and support is still needed.
"The very rapid growth of employment, which was observed at the beginning of the recovery of the economy, is in fact associated with the return of people to their old jobs. Now it is really the creation of new jobs, which is a more labor-intensive and time-consuming process, " said Powell.
It is obvious that high rates of vaccination, budget incentives and the weakening of quarantine measures in the United States contribute to improving the situation on the labor market, also supporting the growth of the American economy.
Nevertheless, the total number of jobs in the country is still about 7 million below the pre-pandemic levels. This is likely to deter the Fed's leadership from raising rates earlier, despite the fact that some officials are increasingly hearing hawkish notes in their comments on the prospects for the central bank's monetary policy.
In this case, the analysts of Goldman Sachs will be right, who believe that the current situation in the markets mirrors the dovish surprises from the Fed in 2013 and 2015, and if history repeats itself, we should expect that the dollar's growth will gradually come to naught.
Critics exclaim that the Fed turns a blind eye to the threat of inflation and encourages the financing of the national debt.
"Talk about curtailing QE is a slide show, no matter how much attention is drawn to it. What matters now is not the Fed's words, but its actions," said Kevin Warsh, a former member of the Fed's board of governors.
"The program proposed by the Democrats to support the economy means a further increase in the debt, despite the increase in taxes to cover part of the costs. Instead of directing these additional tax revenues to cover the existing structural deficit, they are going to create new, unfunded expenditure items," said Michael Falkender, who worked at the US Treasury Department under Donald Trump, now a professor of finance at the University of Maryland.
Experts warn that if the US government continues to increase the national debt, the lack of financial opportunities may undermine political efforts when the economy really needs support.
The leaders of the Federal Reserve are most likely aware of such risks, assuming that by the spring of 2022, the economic boom in the United States will probably already be over, and the data will begin to come out much weaker than it is now.
This, apparently, explains the wait-and-see attitude of the leadership of the Fed, which has repeatedly stated that the central bank should see real progress in moving the national economy towards its goals before starting to reduce the current asset repurchase program.
Given that the Fed's leaders are paying increased attention to the recovery of the labor market, if the US employment data for June turns out to be better than forecasts, the dollar will receive additional short-term support. Otherwise, the greenback will return to a downward trend.
"Now that the dust has settled after the June FOMC meeting, the reality is that a rate hike in the United States is still not close enough to cause a steady reversal of reflationary transactions and a strengthening of the dollar," MUFG analysts said.
"The latest report on employment in the US non-agricultural sector will give an idea of how long it will take for the labor market to fully recover. If the data does not present a pleasant surprise, the recent growth of the USD should turn around even more," they added.
So far, the greenback is trying with all its might to break above 92.00.
If the bullish momentum gains momentum, the next noticeable obstacle will be at the monthly highs of last week around 92.50.
Meanwhile, the 200-day moving average around 91.50 acts as a key support.
The EUR/USD pair continues to trade erratically in the "sideways".
Growth attempts still face quite strong resistance in the area of 1.1975–1.2000, where the Fibonacci correction level of the November–January rally, the 200-day moving average and the psychologically important level of 1.2000 converge.
In addition to the US macroeconomic reports, this week investors will closely follow the speeches of ECB President Christine Lagarde, announced for Tuesday, Thursday and Friday. Market participants are interested in whether the recent weakening of the Fed's dovish mood will affect the tone of the ECB representatives' messages.
"Now the pair remains in a tight range, with the nearest support at 1.1920-1.1912. Its breakdown will complete the formation of a small intraday peak. A decline below 1.1880 will target the pair at 1.1847 and 1.1824," Credit Suisse experts believe.
"Although we do not rule out the formation of a base at 1.1824, a break below this level will target the pair at the lower limit of the narrowing range, which is currently passing at 1.1763. At the same time, a close above 1.2007 will weaken the downward pressure, and the pair may trade for some time in a wider narrowing sideways range with an upper limit at 1.2074," they added.
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