The US economy does seem to be experiencing problems with the recovery, which can lead to very unpleasant consequences.
America's consumer inflation data released on Wednesday showed sharp growth, which the Fed already assumed. However, its increase is very dangerously different with the slowdown in the growth of the number of new jobs in the US economy, which, on the contrary, was not intended by the regulator. It can be recalled that the overall value of April consumer inflation in annual terms surged by 4.2% against the forecasted 3.6% and the value of 2.6% in the previous month. As for the monthly terms, the indicator added 0.8% against 0.6% a month earlier. The annual value of the core consumer price index increased by 0.9% against the forecast and previous March figures of 0.3%.
Now, let's return to the dissonance of extremely weak employment data and very high consumer inflation figures. What is the danger of this phenomenon?
The low growth in the number of new jobs indicates a really low economic activity in the US, while a rise in inflation indicates massive spending of the population. It all happens like this – Americans, who failed to find a job due to low business activity amid the pandemic, receive financial assistance from the state, which is clearly spent on physical living, stimulating demand, and as a result, inflation.
In fact, if there is no real recovery in America's economic activity in the near future, the continuation of an uncontrolled inflation growth will be observed, which will definitely cause a reaction from the Fed. First, the regulator will be forced to stop buying government bonds, and if negative trends continue, then raise interest rates. Such a scenario will cause a strong blow to the real sector of the economy, weakened by the pandemic. Against this background, the local stock market will experience strong problems with the possibility of continued growth. In turn, the US dollar, receiving support from the resumption of growth in Treasury yields, will strengthen against the basket of major currencies.
Assessing the current market situation, we believe that the markets will generally have a general sideways trend until the publication of the updated economic data on the US economy. In the currency market, the US dollar is likely to also consolidate near the 90-point mark on the ICE index. Such dynamics will be observed until it becomes clear that the sharp inflation growth has turned out to be local, and the labor market begins to show a significant increase in new jobs again.
Forecast of the day:
The EUR/USD pair has won back yesterday's target of 1.2065 and found support on it. Amid some improvement in market sentiment, we expect the pair to recover to the level of 1.2175 after the breakdown of the level of 1.2175.
The USD/JPY pair is consolidating after yesterday's growth amid strong inflation data in the US. Today, it could make a downward correction to the level of 108.95 if it declines below 108.95.