The dollar is still struggling to recover from the blow of the unexpectedly low core inflation last week. On Thursday, it became clear that a slow decline in applications for unemployment benefits began. The four-week moving average level of initial applications fell to a five-week low of 823,000, and it is likely to continue to decline in the future, as the period of easing of restrictions due to covid began. Hence the cautious optimism that in February, non-farms will be much better.

As for inflation, it is a structural phenomenon that will not go away. After several decades of inflation targeting, the Fed revised its approach last August to target an average inflation rate of 2% over the long term. In terms of traditional methods of monetary policy, the change in approach means that the Fed can take a break at any time, even if inflation rises above the target. This ultimately gives the Fed more room to maneuver, but at the same time introduces additional uncertainty for investors.

The dollar fell because the likelihood of a rate hike after weak inflation data decreased, but who said that the Fed is going to raise the rate in the foreseeable future? After 2008, there were only two short periods when inflation exceeded the 2% target.

Accordingly, with an incomparably higher level of the budget deficit, there is no way to raise the rate, since the loss of a significant part of income for debt servicing will require additional incentive measures.

We assume that the markets are aware of the fact that the Biden cabinet and the Fed intend to squeeze the maximum out of the measures taken and rather allow the economy to overheat. This means that all attention will be directed to the growth of real rates, and with them, everything is just fine. We assume that the correction in the dollar will not last long, and from next week it will resume its strengthening.

EUR/USD

As expected, the corrective growth in EUR/USD was short-lived, the euro won back 50% of the fall that began on January 6, after which it resumed its decline. The recent interview with the president of the ECB, Christine Lagarde, in which she announced the ECB's readiness to expand the emergency program for the purchase of PEPP assets, should be understood precisely as a direct hint to the markets that the regulator is not interested in further growth of the euro exchange rate.

Another upward pullback to the 1.2120/40 zone is not excluded, which should be used for selling, since the probability that the corrective impulse will drown at this level is high. The first target is 1.2054, then there will be an attempt to go to the minimum of 1.1953.

GBP/USD

UK GDP, according to the first preliminary estimate, grew by 1% in Q4 2020, but despite two consecutive quarters of growth, the GDP level is 7.8% lower than in Q4 2019. Overall, for the year, GDP fell by 9.9%, which was the largest annual decline in UK GDP on record.

Despite the deep drop, the conclusion of the Office for National Statistics can generally be called optimistic, in Q4 there was growth in manufacturing and construction services, albeit at different rates, and a comparison of the latest GDP data with the US, Germany, France, Italy, and Spain does not suggest that the failure of the UK is significantly different from other countries.

The succeeding week will be quite rich in news, with inflation data on Wednesday, GfK survey on consumer confidence on Friday, Markit on business activity, as well as a report on retail sales in January. The Bank of England is in no hurry to take any additional measures to support the economy, it usually follows after the Fed with a delay of several months, and therefore surprises that could send the pound in one direction or another are unlikely.

The pound is trading near three-year highs, but the chances of a move above 1.4379 (high from April 2018) look slim, even though the momentum is technically still strong and showing no signs of a reversal. We expect a rollback to the nearest support 1.3512 and the subsequent formation of the top before the decline phase.