Markets often run ahead of themselves. And they get punished for it. After numerous comments from FOMC officials about additional hikes in the federal funds rate, derivatives raised the likelihood of such a move at the June meeting of the central bank above 60%.
However, the hints of the new Fed Vice President Philip Jefferson about a pause in the process of monetary restriction cooled the hotheads of the bears. The number of “hawkish” speeches, most likely, will not grow into quality. The bet will remain in place. So much the better for the euro.
The major currency pair collapsed to a 9-week bottom amid slowing inflation in European countries and an increase in the number of vacancies in the US. The growth rate of consumer prices decreased from 8.7% to 8.1%, – from 6.9% to 6%, – from 7.6% to 6.3%. Together with a fall to a 2-year low, this increases the likelihood of a serious slowdown in inflation in the euro area.
Dynamics of inflation in Italy and France
Source: Bloomberg
At the same time, the chances of reaching the 4% mark on deposits are falling. The ECB’s monetary tightening cycle is likely to end in July after two 25bp increases in borrowing costs. each up to 3.75%. This deprives the EUR/USD of an important trump card.
The increase in the number in the US in April from 9.75 million to 10.1 million adds whists to the US dollar. The ratio of vacancies per unemployed is 1.8. This is not as high as in March 2022, but if we exclude the pandemic and the subsequent economic recovery, then we are talking about the most serious indicator since 1951. The labor market is still strong as a bull, which allows the Fed to continue the monetary restriction cycle.
To the dismay of the EUR/USD bears, the Fed’s number two Philip Jefferson believes that skipping a rate hike in June will allow the central bank to get more data. This will help assess the need for continued monetary tightening. At the same time, the decision to keep the cost of borrowing at the level of 5.25% should not be perceived by the markets as the end of the cycle.
Investors immediately remembered that Jerome Powell also spoke about the pause. If the top of the FOMC is set to halt, it should be expected. in June, they collapsed to 30%, and the main currency pair managed to find the bottom.
The dynamics of the expected change in the Fed rate
Source: Bloomberg
Patrick Harker added fuel to the fire of the EUR/USD rebound. The President of the Philadelphia Fed proposes to skip every second meeting of the Committee, including the June one.
Thus, the disposition on the eve of the most important US employment report for May has changed radically. If, before the latest comments from Fed officials, figures close to forecasts would have been a catalyst for strengthening, now this requires very strong statistics. I doubt we’ll get it. Therefore, after fixing profits on EUR/USD shorts near 1.0665, we move on to considering the possibility of buying the pair on resistance breaks at 1.0715 and 1.0735.
2023-06-01 06:22:00
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