At the end of last week, the Euro/Dollar exchange rate fell to the support level of 1.1800. Good US macroeconomic data and a change in interest rate expectations have caused the US currency to strengthen recently and made investors nervous about short-term dollar sales.
Fed Chairman Jerome Powell spoke twice last week before Congress. Traditionally, the attention of market participants is focused on these speeches, since the chairman of the Central Bank usually reveals some details of monetary policy in the future. Powell said that the US labor market is still far from the progress that the Fed wants to see before cutting support for the economy. Powell also confirmed that the current price increase, despite the expressed fears of uncontrolled inflation, is associated with the resumption of the economy and will be fleeting.
Taken together, these remarks show the Fed's core message that a rapid recovery will put millions of people back into jobs if it continues. Inflation will eventually remain tied to the Fed's 2% target, and there is no reason to rush into any tightening of monetary policy. According to Powell, the Fed's stable bond purchases and keeping the target interest rate close to zero ensure that monetary policy will continue to provide strong support to the economy until the recovery is completed.
Recall that at the last meeting of the Fed, some FOMC representatives indicated that the regulator would have to step back faster than expected due to a jump in inflation. Powell repeated that the Central Bank is discussing the feasibility of reducing monthly bond purchases by $ 120 billion.
The key event of the coming week will be the ECB's monetary policy meeting, the first after the change in the inflation target. Analysts generally do not expect new signals. The focus of the meeting will be on changes in connection with the new strategic structure. Given that the markets must adapt to the new style of communication, there is a risk of stronger than usual price movements.
Most likely, the ECB will confirm that since the June meeting, economic data generally adhere to the basic trajectory, thereby maintaining a balanced assessment of the risks of further growth. It is unlikely that the risk of the inflation outlook will be noted separately. The economic recovery continues, but the main reason for the too low growth in consumer prices is still not considered in the strategy review. Perhaps the ECB will start discussing the correction of monetary policy in September, when the focus will again be on bond purchases. Targeted long-term refinancing operations will remain a key feature of the ECB's monetary policy toolkit in the coming months.
In our forecast for the coming week, we assume a decline in the Euro/Dollar exchange rate to the support levels of 1.1780, 1.1760, 1.1730, 1.1700 and 1.1675.