Sunday , June 13 2021

The dollar submits

While central banks will compete in gallantry, the pair is unlikely to leave the trading range 1.1265-1.1485

If you go to the right, you lose your horse, you can not save yourself on the left. Strong January statistics showed that the health of the US economy is still well and can withstand international negatives. Another thing is that the impressive growth of the Fed's non-agricultural paychecks did not solve the puzzle: reducing central bank rhetoric increases the risk of accelerating inflation and returning to normalization pushes the US into recession. In the first case, current monetary policy will be recognized as ineffective; in the latter is unlikely to save his own person.

When employment rises by 304,000, an average of 2018 out of 223,000, and for the sixth month in a row adds 3% or more (the longest after recession), the Fed's dilemma does not disappear. Yes, it rose to 4%, but the reasons should be sought in the 35-day closure of the US government. This is a temporary factor, so you can close your eyes on it.

Average wage dynamics and inflation in the United States

Average wage dynamics and inflation in the United States

Average wage dynamics and inflation in the United States

Source: Wall Street Journal.

As a result, FOMC is playing classical economic theory, which states that a strong labor market leads to wage acceleration and inflation. Fiscal incentives and import duties can further accelerate PCE. The Pigeons, on the contrary, adhere to the modern theory of secular stagnation. It suggests that the economy can not afford a high pace due to the slower than before GDP growth and oversupply of savings on investment. In simple terms, monetary policy should not be tightened, as seemingly low rates are actually high.

The Federal Reserve has experience in the past. In the last three months, including January, employment increased by 241 thousand, which is the best trend since December 2015 (+283 thousand). By the beginning of 2016 world stock indices began to collapse, and the impact of international risks was provoked by the slowdown of non-agricultural payroll, on average to 148 thousand in March-May. Then the Federal Reserve, instead of four interest rate increases, is limited to one. If such a story happens now, the central bank will not take active steps by the end of the year or complete the cycle of normalization. On the contrary, to keep its labor market power in February-March, another act of monetary constraints will emerge on the horizon, allowing investors to buy the US dollar.

An important role in this peak was the growth in Treasury Bond yields. The rapid growth of the average wage over inflation is a strong argument in favor of a strong economy. At the same time, the change in the start of the ECB's interest rate increase process in June 2020 strengthens the risks of a fall in the yield of German bonds in the red zone. When the Federal Reserve and the European Central Bank surrender to one another, the fate of the main currency pair will be determined by macroeconomic statistics. Its deterioration in the US seems more likely than in the eurozone, which allows me to recommend the purchase of the euro at a fall of 1.1395-1.1405 dollars and 1.133 dollars.

Dmitry Demiddenko for LiteForex

Source link