FOREX Fundamental analysis on August 12, 2022
The markets went against the Fed. The "hawkish" rhetoric of FOMC members did not stop S&P 500 buyers. Demand for risky assets is growing, and any slightly positive news sharply strengthens stock indexes, and through currency correlation, and EUR/USD.
However, literally the day after the release of the US inflation report, the S&P 500 went into the "red" zone, making Eurodollar buyers nervous.
At the same time, the decline in the consumer price index from 9.1% to 8.5% reduced the probability of a Fed rate hike in September by 75 basis points, which collapsed the yield of treasury bonds, but made the stock market attractive. EUR/USD rose to 5-week highs.
The stock market was also supported by the reduction of recession risks. After the release of the US labor market report, investors believed that the United States economy would be able to avoid a recession. According to Goldman Sachs, a local slowdown in the economy is possible, but not a recession.
The demand for risky assets is somewhat different from the Fed's plans, as the weakening of the dollar improves financial conditions, allowing companies to spend more, including on wages, which accelerates inflation. The Fed has opposite goals, but the recovery of stock indexes can be stopped only by Jerome Powell.
The speech of the head of the Fed is able to sober up EUR/USD buyers. But the euro, if you look at it, has plenty of problems of its own. Bloomberg believes that in October – March, the Eurozone economy will face a recession. And if we add here the slowdown in GDP, the political uncertainty of Italy and the very limited actions of the ECB, then there is no desire to buy the euro.
While investors are buying up risks, EUR/USD remains afloat. The fall of the pair below 1.028 will be a signal for the formation of short positions.