After the market was convinced that the Fed was ready to allow the economy to overheat, even the impressive 6.4% GDP growth in the US in the first quarter failed to provide the US dollar with adequate support. The economy is growing thanks to consumers, whose spending has increased by more than 10% due to massive fiscal stimulus and improved epidemiological conditions, showing the best dynamics since the 1960s. The Federal Reserve, judging by Jerome Powell's speech after the FOMC meeting, turns a blind eye to the acceleration of inflation and monitors exclusively the labor market.

The Fed chairman acknowledged the progress in the development of the economy but said that it was not yet time to wind down QE. Powell stressed that the United States has not yet come out of the woods – they have not coped with all the problems they face. Indeed, the March employment growth of almost 1 million was impressive, but this is just one report. The central bank will continue to buy assets for $120 billion a month and prefers not to talk about the withdrawal of monetary incentives for now. They clearly fear a repeat of the 2013 taper tantrum. Interestingly, inflation expectations are now almost as high as they were then.

Dynamics of inflation expectations in the USA

It is quite possible that even an increase in consumer prices from the current 2.6% to 3.5% will not force the regulator to act. I immediately recall the Austrian school of economic theory and its term "boom surge". During a boom that has broken out, the central bank tries to support it indefinitely, ignoring the consequences of inflation and asset bubbles. It continues to regale the economy with cheap money and is wary of shutting off the liquidity taps. In such conditions, it becomes dangerous to keep cash and assets vulnerable to inflation. Most likely, we are soon expecting an increase in the yield of US Treasury bonds, which in March provided serious support to the bears on EUR/USD.

Does this mean that the trend for the main currency pair will reverse again? For the second time in three months? The seasonal factor says that this is possible. In May, from 1975 to 2020, the US dollar closed in the green zone against the euro 30 times out of 46. The fundamental analysis casts doubt on this. The acceleration of vaccinations in the EU is fraught with the crackdown of European GDP and higher yields on bonds, to which the ECB, unlike in March, will turn a blind eye. The reason for the rally in debt rates this time will be the recovery of the eurozone economy, and not external factors.

At the same time, it is hard to say that the position of the US dollar is hopeless. Judging by the dynamics of applications for unemployment benefits, in the next few months, employment will steadily add 1 million or more. If this is the case, the economy will return to full employment by Christmas. What will the Fed do in this case?

Dynamics of employment and applications for unemployment benefits

Technically, after reaching the target of 78.6% according to the Gartley pattern, a natural pullback followed. Rebounds from the levels of 23.6%, 38.2%, and 50% of the CD wave, which correspond to the levels of 1.2045.1.198 and 1.193, are usually used to form longs.

EUR/USD, Daily chart