The report on inflation in the USA, multiplied by Christine Lagarde’s press conference, will show today whether it is common sense or emotion that rules the Forex market.
On the eve of important events, the EUR / USD bulls, hoping for success, tried to storm 1.2220, but again failed, and the pair quickly returned to its original position. Now traders remain on full alert waiting for the news of “Hot Thursday”.
Bloomberg predicts that inflation will accelerate from 4.2% to 4.7% in May, but this will not change the Fed’s wait and see attitude. Jerome Powell has repeatedly stated about the temporality of bursts of inflation, and I must say, there are grounds for these statements. We must not forget that the current situation differs from the canonical calculations primarily by the huge difference between today’s and pre-pandemic employment. Due to the risks associated with COVID-19 and the abundance of incentive payments, the labor market lags far behind the pace of economic growth, forcing employers to raise wages in order to attract potential employees to jobs. Average wage growth in the second quarter turned out to be much stronger than expected.
The economic downturn caused by COVID-19 is in stark contrast to theoretical assumptions, adding uncertainty to forex currency trading. Bloomberg is looking for analogies in history, but the models of the past are unlikely to lift the veil of the future. The Federal Reserve expects inflation to accelerate shortly, and it will soon begin to slow down. But how will it actually be? The analysis does not exclude the strengthening of the CPI to 5.5% with a subsequent rollback to 5% by the end of the year.
Nobody knows, including the leadership of the Federal Reserve, how inflation will behave in the future. But the volatility of currency pairs today will depend not only on the US inflation report. The release coincided with an equally important event – the conference of the head of the European Central Bank.
The ECB is unlikely to change anything in the course of monetary policy, but it may raise the economic outlook and inflation outlook, adding that despite high inflationary growth rates, the indicator will not reach the target level of 2%. Christine Lagarde, as well as Jerome Powell, will probably note the temporary growth of consumer prices and will say about the continuation of the asset purchase program. The head of the ECB will try to limit the growth of the single currency with dovish rhetoric. But will it manage to curb the EUR / USD bulls?
I believe that the increase in volatility will bring a roller coaster to the dynamics of today. Entering breakouts in such conditions is quite risky. Trading will be safer at the end of Christine Lagarde’s conference. I consider the line 1.2180 as the pivot level for EUR / USD.
Dmitry Dimidenko, analyst at LiteForex
Latest news from financial markets, forex analysis on the Home page