The dollar is at a crossroads. The fate of the foreign exchange market is in the hands of the Fed and the ECB

Global financial markets are balancing moderately amid expectations of fresh inflation data in the United States and comments from the European Central Bank on monetary policy. Undoubtedly, both events will become the determining vector for the further dynamics of the foreign exchange market by the beginning of the American trading session, and in the stock market they will be relevant for a long time.
According to the preliminary scenarios of analysts, we are waiting for data on the acceleration of general inflation in America to 4.7% y / y; at the same time, the base value, according to experts, will grow to 3.4% y / y. Such high-profile figures promise to provoke an equally loud reaction from society and the media with spectacular materials about perennial highs in price increases.

The dollar is at a crossroads. The fate of the foreign exchange market is in the hands of the Fed and the ECB

As for the reaction of the markets, their focus at the moment is monthly dynamics. So, since January 2021, the level of price growth has been constantly increasing, starting from the level of 0.2% in December 2020 and reaching 0.8% in April of this year. The long-awaited information for May is likely to show an increase of only 0.4%. At the same time, the base CPI, according to experts, will grow by 0.5% following the April jump by 0.9%. The reason for the strong growth in the indicator a month earlier was the change in prices for used cars.
If the published data exceed analysts' forecasts, the markets will panic, and the idea of ​​a temporary rise in inflation will go out of the focus of attention of their participants. Having received such a signal, the US Federal Reserve System will be forced to return to discussing a roadmap to roll back quantitative easing and normalize interest rates.
A tangible surge in inflation may stimulate the resumption of the activity of speculative buyers of the dollar, however, a truly solid impetus for the flow of purchases can receive only after the FRS's approval of the change of course towards normalization.
The same can be said about today's meeting of the European Central Bank. Foreign exchange market participants are waiting for possible policy changes and fresh scenarios on rates and actions of the ECB. The European Central Bank is expected to act cautiously and gently, slowly rolling off asset purchases on the balance sheet, relying on the 2nd% inflation rate against the US 4.7%.

Considering all of the above, we can confidently assert that in the near future the dollar has a chance for revenge. Whether these assumptions are valid in the short term depends on the evidence and decisions of the central bankers.

We will remind, the news on inflation in the United States will be published at 12:30 GMT.
FX24

Author’s Posts