EC Dollar Soars As Investors Cue Into FOMC

The U.S. dollar ended the week higher against all of the major currencies with today’s rally a delayed reaction to Thursday’s inflation report. Stronger than expected consumer confidence also helped to boost demand for U.S. dollars ahead of next week’s Federal Reserve monetary policy announcement. U.S. policymakers have insisted that the increase in inflation is transitory with disappointing consumer spending and labor market numbers discouraging taper talk next week.

However many central banks in weaker recovery positions have begun the process of policy normalization by reducing asset purchases so there’s growing belief that it is high time for the Federal Reserve to do so as well. It will be a close call next week because the Fed has consistently downplayed price pressures but the 5% year-over-year CPI increase is the largest in more than a decade. Excluding food and energy, the increase was the largest in nearly three decades. No other major country is running inflation as hot as the U.S. and the problem is that the high prices for travel, food, and autos may not fall as quickly as the Fed anticipates as some of these businesses look to recoup lost income.

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The rally in the U.S. dollar and rise in Treasury yields tells us that investors expect policymakers to discuss tapering and make subtle shifts in their language to prepare for that eventuality. With the market divided on which way the Fed will sway, Tuesday’s retail sales report will go a long way in setting expectations for Wednesday’s policy meeting.

Speculation about Fed taper talk and the European Central Bank’s decision to avoid the discussion sent EUR/USD tumbling on Friday. With no major Eurozone economic reports on next week’s calendar, the euro will take its cue from the market’s appetite for U.S. dollars. Sterling weakened despite mixed data. Monthly GDP growth and the trade balance were stronger than expected but industrial production unexpectedly declined. It is now widely believed that the U.K.’s target for a full reopening will be delayed from June 21st to the end of the month due to rising COVID cases. U.K. Chancellor Rishi Sunak said he could accept a delay of up to four weeks. As we mentioned in yesterday’s note, a delay would hurt sterling. Next week is a busy one for the U.K. with inflation, employment, and retail sales reports scheduled for release.

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William K. 6 days ago Member's comment

And with inflatiion jacking up the prices of almost everything, how can the federal reserve bank say it is not a problem. And I thought that banks openly lyng to everybody was a crime.

I really hate being lied to and robbed at the same time by the same people.