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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