Dollar began to lose ground after the congressional speech of Fed Chairman Jerome Powell. According to him, interest rates will remain zero, which is not much different from his earlier statements. To add to that, Powell continued to downplay the risks of inflation, even though it frightened investors just recently and led to a sharp rise in Treasury yields. He also spoke a lot about the need to support the economy since recovery to pre-crisis levels is still far from reach. He pointed out that rising prices does not always lead to persistently high inflation.
With regards to Treasury yield, the global printing press, which minted about $ 9 trillion over the past year, made many investors think about inflation. Many expect a surge in the near future, so even if the world's central banks do not condone the idea of curtailing support programs, they may be forced to do so if inflationary pressure accelerates. It is also clear that investors are thinking ahead and do not fully trust the statements of the regulators, especially after what happened in 2014, when the Fed delayed policy changes so much that it led to another financial collapse in the debt market.
Nevertheless, the Fed will continue working on achieving its target inflation, which is 2.0% or above.
"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 assistances are needed because there is still a long way to go before the economy returns to its pre-crisis state.
In fact, according to UniCredit SpA, the US has much more stimulus measures than other countries, such as the EU. As a result, Europe is lagging behind the US in terms of growth or economic recovery.
To add to that, Joe Biden's proposed $ 1.9 bailout bill, although will more than triple government spending this 2021, will push the US economy up by approximately 1.8%. On the other hand, EU GDP may contract by 0.1%.
Economic growth is slow in the EU since all member states impose their own fiscal policies, and it is very difficult to achieve any common approach and coherence. Last year, negotiations took months before the bloc agreed on a recovery fund. The European Commission had to ensure that the distribution of funds is correct, otherwise, the stability and integrity of the eurozone will be undermined.
Going back to the US economy, the Department of Commerce released a report on new home sales yesterday, and it indicated an increase in the index for January. Sales have risen by 4.3% to 923,000 per year, much better than the expected 1.5% to 855,000.
Today, a report on Germany's consumer confidence will be published. If the data comes out better than the forecasts, demand for the euro will grow. Experts forecast the index to rise to -14.3.
Then, by mid-afternoon, the European Central Bank will release lending data for January. The European Commission, meanwhile, will publish the final results of its economic and business sentiment survey. The economic sentiment index is expected to rise to 92.0.
As for EUR/USD, a break above 1.2180 will push the euro towards 1.2220 and 1.2260. There is no need to panic if the price moves down a bit, since 1.2135 will be a strong support level. And even if this area is broken, long positions will still increase around 1.2090.
