FOREX Fundamental analysis on February 21, 2024
The whole world is in constant motion, and financial markets are no exception here. A few weeks ago, traders were confident of an imminent reduction in federal funds rates, which forced Jerome Powell to cool the ardor of investors.
Currently, traders expect the minutes of the January FOMC meeting to demonstrate harsh rhetoric. Actually, the markets still heard the Fed, as a result of which the US dollar lost its key position in forex currency trading, allowing the EURUSD to gain a foothold above the 1.08 level.
In fact, there is a certain logic in the fact that the main currency pair, despite the strong data on January CPI and PPI, did not collapse to the level of parity. The index of personal consumption expenditures, an indicator of inflation for the Fed, decreased from a peak of 7.1% in June 2022 to 2.6% in December last year. However, this figure includes a 4% increase in inflation in the first quarter of 2023, which will soon fade into oblivion. On a six-month basis, the PCE has already approached the target level of 2%, and on a three-month basis it even approached zero. It is logical that the Fed is preparing to cut rates in 2024, despite the fact that experts' estimates on the scale of monetary expansion have fallen to 3-4 acts.
But is it possible to keep inflation low with a strong economy? Theoretically, this is unlikely. In practice, the pandemic, the war in Ukraine, the conflict in the Middle East, as well as the related destruction and subsequent restoration of supply chains, as well as artificial intelligence technologies have dramatically increased labor productivity over the past three quarters to 3.9%. This is twice as much as in the decade before COVID-19. As a result, US GDP is growing, contributing not only to the strengthening of stock indexes, but also to the acceleration of the economies of other countries.
The euro reacts sensitively to global growth, as it relates to pro-cyclical currencies, especially given the reduction in the main PBoC interest rate. This can support the Chinese economy, and the outstripping dynamics of wages in comparison with inflation can help the Eurozone economy. As a result, global economic growth may be higher than expected, which will be a positive factor for the EURUSD bulls.
Although the euro certainly has its vulnerabilities. The main problem of the main currency pair is the risks of accelerating American inflation. This can affect stock indices, increase the yield of US Treasury bonds and, through currency correlation, support the US dollar. However, there is still a lot of time before the new CPI and PPI data, and so far EURUSD can enjoy success.
What doesn't kill us makes us stronger. If the euro passes the test of the "hawkish" rhetoric of the minutes of the January FOMC meeting, EURUSD buyers will receive an incentive to push the pair at least to the level of 1.088. When everyone sells, there is a great opportunity to buy.