Since the beginning of March, the EUR/USD has moved in favor of the greenback as concerns over COVID faded. The two-year yield differential between the U.S. and Europe moved in favor of the U.S. dollar. This has helped buoy the greenback. Inflation expectations are on the rise Everything from gasoline to food to used cars is surging. Federal Reserve believes that the upward momentum in prices is transitory. This is despite the upward trend. It is expected to keep its bond purchase program in place. If and when the Fed begins to walk back its accommodative policy, their action could help tighten U.S. interest rates. This action may push the yield differential further in favor of the greenback, which may help further increase volatility in forex trading and buoy the exchange rate of the U.S. dollar against most major currencies.
Fed Meets in July
The outcome of the FOMC meeting was the focus for currency and interest rates traders at the end of the month. Ahead of the meeting, the market was pricing in an unchanged announcement by the monetary policy committee. The one issue that could be of note was the Fed’s focus on mortgage-backed securities as part of their asset purchase program. With the housing market on fire, the Fed announced in its June meeting that it was considering reducing mortgage-backed securities in favor of additional Treasury securities.
The Fed chief Jerome Powell said he would give the market advanced warning that a move in interest rates was on the horizon. His comments ahead of the meeting, in testimony in front of Congress, remained dovish. Expectations ahead of the announcement by the Federal Reserve were that the monetary policy committee would not deviate from its prior notification. The increase in the number of Delta variant covid cases is keeping the economy in check.
COVID is Beginning to Re-emerge
On July 27, the Center for Disease Control (CDC) announced that it was again changing its guidance. The CDC reported in late July that it was now recommending that everyone wear a mask indoors in places where the coronavirus is spreading widely. The change in the recommendation is to combat the spread of the Delta variant. The CDC is reversing a proposal that they made just three months ago, when the agency said those who are vaccinated no longer need to wear masks. This issue could be the beginning of a change to the way the U.S. economy is functioning. The growth expectations and the price rise could be reversed, which is one of the Federal Reserve’s concerns. If this variant does not spread as feared, the dollar may continue to gain traction.
Prices are On Fire
Another issue that is facing the Fed is the rapid increase in prices. Inflation and inflation expectations continue to simmer, but the Fed has yet to pull away from the punch bowl. As people have withdrawn from public transportation, they have accelerated their shopping for cars. Unfortunately, a fly in the ointment has been the lack of computer chips which has reduced inventory. The lack of computer chips has created a shortage of new cars, leading to a surge in used car sales.
According to a recent Wall Street Journal story, the average price of a used car increased by 34% to $18,453 year over year. Car prices are not the only asset that is surging. Home prices are also on the rise. According to the Case Shiller Home Price Index, housing prices increased by slightly more than 16% year over year. The strong demand for housing lifted lumber (which has subsequently declined) as well as copper prices. Energy prices are also on the rise. Gasoline prices are up substantially year over year, generating an additional tax on the American consumer.
The volatility in the forex market has been relatively subdued, despite the issue that faces the Federal Reserve. This lack of volatility in forex trading may likely begin to pick up when the Fed announces that they plan to pull back their current bond purchase program. Until this change occurs, complacency will continue to overwhelm currency traders, keeping most major currencies rangebound.
The Bottom Line
The upshot is that forex trading has favored the greenback, despite the lack of fear that rates will move higher in the United States. The Fed said it would give a clear signal to the market before deciding to make a change to policy. This change includes their bond purchase program as well as short-term interest rates. Inflation is rising, but the Fed continues to believe that this change is transitory. Wages are now on the rise, and once wages begin to accelerate, the Fed will need to put their foot on the brakes, which may generate higher levels of volatility in the forex trading arena. Since the beginning of March, the EUR/USD has moved in favor of the greenback, MetaNews is dedicated to bringing you the most accurate, relevant information available on market news.