A combination
of market events on Thursday seem to largely illustrate a possible disposition
of the U.S. Dollar and the Euro. First of all inflation in the United States
presented a 13 year record high as it jumped to 5.0% vs the forecasted 4.7%,
and the previous April figure of 4.2%.
Such a
surge in prices may have been a shock for investors some time ago, and led to
immediate strengthening of the Greenback amid swift actions from the Federal
Reserve (Fed) to tighten monetary policy. And, the first market reaction was in
sync with this notion that a lot of investors still have nowadays. But, things
have changed. The Fed and most of its officials are constantly repeating
themselves, saying that high inflation has a temporary effect on large monetary
stimulus. Such temporary rise in prices, according to the Fed, would not
undermine the economy and would not leadto any changes to the current monetary
policy set forward by the Fed. So, the market seems to be testing these notions in practice, and for
now these notions seem to carry some merit.
After the
release of inflation data there was an initial rise of the U.S. Dollar index
from 90.09 to 90.32 points. This slight move was probably not expected, and almost
immediately after the fact, the index returned to 90.02 points.
Strategically
this may indicate to the possibility that investors may consider that the Fed’s calm
stand may continue even in times of extremely high inflation. So, a further
rise of prices may not lead to the strengthening of the Dollar. In this regard
it is a negative signal for the Greenback.
Moreover,
the market took notice of the words of Christine Lagarde, the President of the
European Central Bank (ECB) just before U.S. inflation data was released. During
a press conference Lagarde said that the monetary stimulus measures taken by the
ECB would not be subject to any significant changes. She even promised to provide
more stimulus measures this summer due to a seasonal lack of liquidity. It was
a clear bearish message for the Euro. However, investors were seen to be more
concerned about the ECB’s economic growth forecast and inflation in the
Eurozone. As a result, the Euro remained in a range between 1.21400 and
1.22000.
So the
Greenback may descend further while the Euro may perform an upside movement
despite the continuous ultra-loose monetary policy of the ECB. If this
continues, a gradual strengthening of the Euro against the Dollar above 1.2270
may be possible. Once this level is reached, the Euro may climb even higher to
1.2350.
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Analysis and
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purposes and don't represent a recommendation or investment advice by
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