Fed changes its discourse; the U.S. Dollar strengthens – Market Overview

Fed changes its discourse; the U.S. Dollar strengthens – Market Overview

Fed’s Randal Quarles said yesterday that it would be necessary to undo the Q.E. tapering process should the economy continue with the current rate of recovery and growth.

Last week, many Federal Open Market Committee members largely discarded the possibility of an inflationary process and, with it, the need for a decision to reduce asset purchases earlier than expected.

So now the market’s uncertainty resumes. The key economic figures related to the economy's growth, inflation and employment could be crucial for investors since they could dictate how the Fed might react.

Such reports are scheduled for today, including preliminary GDP for the first quarter, durable goods orders, and unemployment claims. All of these could impact the market should they exceed expectations and show signs of a strong recovery rate. The non-farm payroll and the unemployment rate could still be of greater importance, but they will be published next week.

Following all these developments, the U.S. Treasury Bonds Yields saw timid gains, with the 10-year benchmark advancing to 1.58%.

The effect on the currency market.

The U.S. Dollar dollar has strengthened slightly after the reaction, although it remains within an area without a clear trend.

EUR/USD has failed to break above the intermediate resistance level of 1.2260 and moves back to the 1.2200 zone. From a technical analysis point of view, it is starting to show signs of exhaustion, revealing some bearish divergences on the daily RSI.

The latest rise in the euro price above the 1.2200 area also opens another front for the European Central Bank. ECB may see its expansionary monetary policy objective threatened if the euro continues to rise. At the same time, the bank itself appears to allow it to continue and even increase stimulus since a stronger euro could remove the possibility of a rebound in inflation below the 2% target.

In this regard, the next meeting of the ECB will be of great interest to the market. No change in its policy is expected, but Lagarde's statements could be more clarifying and impact the price of the euro.

The currency pair most sensitive to the long-term interest rates of the dollar is USD /JPY.

After the upward momentum that started in early 2021, the pair has been experiencing a period of consolidation since early April. From a technical point of view, this period can be considered as a continuation triangle. Only a new rally in U.S. bond yields could support the pair, currently finding its main resistance around 109.60.

Sources: Bloomberg, reuters.com.

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