On Thursday, Jerome Powell's speech on national public radio surprised the currency markets again, which led to a strong collapse in stock indices, lower prices for commodity assets and a rise in the US dollar.
What happened and what should be expected in the markets soon?
The Fed Chairman reiterated his rhetoric about the country's economic situation and his perspective on its development. However, investors heard a new comment from him, which was previously expected. Powell said that as the economy recovers and makes noticeable progress towards the goals, buying bonds will now be stopped. In fact, he made it clear that as soon as there are stable signs of economic growth, and the dynamics of inflation growth stabilize, the Fed will begin a smooth tightening of monetary policy. It plans to refuse to buy government bonds first, and then start the process of raising interest rates in the future.
This news caused a rise in volatility in all currency markets without exception. Initially, stock indexes in Europe and the United States were under strong pressure, which was accompanied by a rise in the dollar. But apparently, greed outweighed all existing risks and manifested itself in an equally strong pullback. Investors began actively buying company shares and commodity assets, deciding that the factor of economic growth in the US, and then in other economically developed countries, is stronger than all other risks. These sentiments caused the US dollar to weaken, but it was not so significant. This is because the yield of treasuries did not decline to the change in market sentiment, but even slightly increased.
Today, the 10-year Treasury benchmark yield is showing an increase of 1.10%, reporting to 1.632%, which is noticeably lower than the recent high of 1.754%. It is likely that the yield on government bonds may stabilize at the previously reached levels. If this happens, we should expect a local weakening of the dollar and the resumption of a limited growth in stock indices.
Overall, the forecast made when this week began still persists. Yesterday's US data on spending and the value of the price index for personal consumption expenditures did not show growth, which probably allowed the markets to decide for themselves that inflationary pressures are not strengthening yet. In this case, they turned their attention to the values of applications for unemployment benefits, which declined from 781,000 to 684,000 a week earlier.
In terms of the prospects for the development of market events, we believe that the general sideways trend with local fluctuation will most likely continue not only today, but also next week.
Forecast of the day:
The EUR/USD pair showed the likelihood of a local upward rebound. If the data from the German IFO business climate index does not disappoint and grows, and the value of the basic index of personal consumption expenditures in the US does not grow, the pair may continue to recover to the level of 1.1735 or even higher to 1.1875.
The GBP/USD pair is also recovering. If UK's retail sales data is positive and the pair rises above the level of 1.3770, we can expect its local recovery to 1.3865.
