Euro and pound fell last Friday because of the latest data on US inflation. Evidently, investors are worried that the Federal Reserve has no plans of cutting back its bond purchases amid rising inflation.
This week, the long-awaited policy meeting of the Fed will take place, but many expect the central bank to stick to its dovish stance, at least until the end of summer. Since no changes are expected, interest rates are likely to remain at the same levels. But traders will be on the lookout for any hints of when and how the Fed will begin to phase out bond purchases.
Investors will also monitor data on US retail sales, manufacturing, inventories and home construction to see if supply chain problems remain and where consumer demand is now.
Still, some analysts hope that the latest inflation data could push the Fed to reconsider its stance on monetary policy. They believe the central bank may change its mind and raise interest rates at an earlier date. However, the committee is unlikely to reduce its bond purchases until August or September this year.
Rates are also likely to increase no earlier than 2023. A number of analysts even believe that changes will occur only in 2024, which is in line with the March forecast of the Federal Reserve.
Obviously, this means that bond purchases will not ease yet, although a Bloomberg survey said 33% of analysts surveyed expect the Fed to cut its current monthly bond purchases by $ 120 billion at the end of August. About 33% think it will be in September. The second reduction is expected in December 2021.
On a different note, the University of Michigan released a report on Friday, which showed that consumer sentiment in US is recovering much stronger than projected. The data said consumer sentiment rose to 86.4 points in June, after falling to 82.9 points in May. Analysts expected the index to rise to 84.0 points.
Consumer expectations also jumped to 83.8 points, while current conditions rose to 90.6 from 89.4.
As for EU, Bundesbank said Germany will grow by 3.7% in 2021, then by 5.2% in 2022. The central bank strongly believes that economic activity will return to pre-crisis levels this summer.
Bundesbank also projects inflation to jump because of higher VAT rates, new CO2 certificates and soaring prices for both crude oil and food. Therefore, by the end of this year, it may reach 4%, while harmonized inflation will be at 2.6%. In 2022, CPI should decline to 1.8%, then to 1.7% in 2023.
Destatis also reported that wholesale prices in Germany grew at the fastest pace since mid-2008, rising by 9.7% year-on-year in May, thanks to the 46.8% jump in oil prices.
All this should be bullish to euro, but the strong selling pressure last Friday threatened the upward potential of the currency. Now, a lot depends on 1.2130, as a break above it will set off a jump to the 22nd figure. But if the quote returns to 1.2070, euro will plunge to 1.2020.
The latest report on UK GDP was both negative and positive. On the one hand, the data is much lower than expected, while on the other hand, it is higher than the figure last month.
According to the report, GDP rose 2.3% in April, slightly lower than the expected 2.4%. In March, GDP was up by 2.1%.
Growth occurred because the service sector jumped by 3.4%, thanks to the lifting of quarantine restrictions. Sadly, the manufacturing sector fell 1.3%, which is its first drop since January 2021.
UK trade deficit also narrowed to £ 10.95 billion, while service surplus widened to £ 10 billion.
But despite all this, pound remained in a horizontal channel, trading from 1.4080 to 14190 for almost a month. Only a drop below the lower limit will push the quote to new lows, plausibly to 1.4040 or 1.3930. Accordingly, a rise above the upper limit will result in a large jump towards new highs, at 1.4310 or 1.4380.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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