At first, the US dollar remained weak since Fed Chairman Jerome Powell said interest rates will stay close to zero for quite a long time. But later on, demand for the currency picked up, after the release of strong reports on the US economy.
The continued rise of Treasury yields also led to a sharp decline in risk appetite.
Yesterday, reports on industrial and consumer prices were released, and they indicated a sharp rise amid strong demand and supply disruptions. In fact, US PPI has already exceeded the highs reached last 2012-2013, and it still continues to grow rapidly this year.
To add to that, in a survey, many companies said they are ready to raise prices for their products and services, since economic growth is now accelerating. Such statements then lead to even more debate on whether US inflation will rise after the end of the pandemic. The answer is obvious - it will, especially amid the upcoming stimulus in the US.
The Federal Reserve also expects a sharp rise in inflation. According to Jerome Powell, the central bank will allow inflation to go beyond 2.0% as a compensation for its shortcomings in the previous years.
"Our policy will remain the same since inflation is still low and the labor market remains far from maximum employment," Powell said.
However, indicators show that some prices are overvalued and does not indicate a stable formation of inflationary pressures. For example, car prices rose because of chip shortages and supply chain disruptions in the tech industry.
"This phenomenon will not necessarily lead to sustained inflation, as inflation is a process that repeats itself from year to year," he noted.
Meanwhile, answering numerous questions about the risk of overheating the economy, Powell said additional assistance is needed because there is still a long way to go before the economy returns to its pre-crisis state.
But the ongoing increase in Treasury yields indicate that investors do not fully trust the Fed's statements. In fact, they seem to be relying on the figures that are being released.
Nevertheless, Atlanta Fed President Raphael Bostic said that economic growth in the US is much faster than expected. In that regard, the Federal Reserve will continue supporting the economy and, in particular, the labor market, which is still in crisis after losing 10 million jobs.
And although some members do not hide their optimism regarding the good pace of economic growth, they are still adhering to the course set by Powell, which is to maintain a super-soft monetary policy. For example, Bostic shifted the attention to the US labor market, reiterating that the Fed's main goal is a full employment.
Fortunately, the US labor market is recovering. In fact, according to the US Department of Labor, initial jobless claims have fallen to 730,000 (down by 111,000), which is much lower than what economists had expected. This could be a signal that the labor market will be able to return to its pre-crisis state.
Meanwhile, as for US GDP, the Department of Commerce said the value for the fourth quarter (of 2020) was revised to a much better figure than the estimate. Real GDP was up by 4.1%, as compared to the preliminary data that is 4.0%. The main driver of this revision is the increase in investments in both fixed assets and private stocks.
US spending, however, grew a bit lesser than previously reported. According to the latest data, expenses increased by only 2.4%, which is lower than the previous 2.5%.
As for orders for durable goods, they increased sharply this January as compared to the previous month. The index rose by 3.4%, which is also much higher than the projected 1.1%. The main driver for growth is the jump in orders for transport equipment, which grew by 7.8%. But even if volatile categories were removed, orders still increased by 1.4%.
Meanwhile, home sales fell quite strongly in January. The index dropped by 2.8% to 122.8 points, according to the National Association of Realtors (NAR).
With regards to the EUR / USD pair, only 1.2140 is keeping the price from falling further in the market. Therefore, its breakdown will lead to a huge drop towards 1.2090 and 1.2035. But if the bulls manage to regain control of the market, the euro might return to 1.2190. Then, a consolidation above will lead to an upward move towards 1.2240.
Similar to the euro, in the GDP / USD pair, 1.3950 is keeping the price from falling further in the market. Hence, its breakdown will lead to a drop towards 1.3840 and 1.3735. But if the bulls manage to regain control of the market, price may return to 1.4050, where a consolidation above will lead to a more active growth towards 1.4120.
The US stock market reacted with a sharp drop to the latest news, as did the cryptocurrency market, which, after a short respite, returned to its corrective lows. In fact, a breakout from $44,900 will lead to another sell-off in Bitcoin, around $38,000.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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