Yesterday, the EUR/USD pair declined by more than 100 points, stopping only near the support level of 1.1780 – the lower border of the multi-week range, which corresponds to the lower line of the Bollinger Bands indicator on the daily chart. Traders did not dare to assault this price barrier before Jerome Powell's "two-day marathon". Today, the Fed Chairman will start his two-day speech in the US Congress. First, he will submit a semi-annual monetary policy report to the Financial Services Committee of the House of Representatives, and tomorrow, to the Banking, Housing and Urban Affairs Committee. Given the fundamental importance of this event, the EUR/USD bears decided not to push their luck and recorded a profit in the area of the support level. The "Powell factor" has calmed down the dollar bulls. The US dollar index also stopped at the 93rd mark, reflecting traders' indecision.
In general, this indecision is quite justified. Just two weeks ago, the Fed Chairman announced "dovish" rhetoric in Congress that allowed buyers of EUR/USD to organize a massive upward correction. Powell assured the congressmen that the US regulator will not raise interest rates immediately, focusing only on inflation indicators. He repeated the rhetoric several times during his speech, the essence of which is reduced to a wait-and-see position. According to him, the Fed will not tighten the parameters of monetary policy only because of "fear of inflation", since the growth of inflation indicators is temporary and is largely due to the low base of last year. At the same time, he vaguely commented on the fate of the incentive program. He also said that the members of the regulator want to first see "significant progress" in the economy and only then start discussing the issue of curtailing QE.
Is it possible to talk about the significant progress today, given the fact that Nonfarm data are showing strong results for the second month in a row, and inflation has been updating long-term records for the past three months? For example, Fed representative Mary Daly said that a few months of rising inflation does not mean that it is not temporary. At the same time, she acknowledged that short-term inflation expectations are still growing, while long-term ones are stable. Commenting on yesterday's release, Daly noted that the global economy has recently been dominated by downward factors affecting inflation, and the risk of the spread of the Delta strain does not allow us to look to the future with confidence. Her rhetoric also contributed to the fading of the downward momentum of EUR/USD, as investors made a well-founded assumption that Powell would voice similar theses today. As a rule, he tries to calm down the agitated markets, thereby paying off the Fed's unnecessary volatility.
In general, there is no consensus on the market regarding the prospects for further inflationary growth. Some experts said that US inflation has already reached its peak values and will show a downward trend in the second half of the year. Powell will most likely voice this position in Congress. According to other analysts, the price growth is currently mainly occurring in fairly narrow categories, but there are numerous signs that it may expand as quarantine restrictions are lifted.
In this context, it is necessary to consider the structure of yesterday's release. The major part of the growth in the consumer price index is associated with gasoline prices, which are significantly higher than last summer when the coronavirus crisis provoked a sharp decline in demand for transportation, as well as a decline in oil prices. For example, the cost of gas has increased by 45% compared to 2020, while food prices rose by 2.4%. But even without considering the unstable food and energy prices, the core consumer price index increased by 0.9% in June and 4.5% in annual terms. Experts also drew attention to the record increase in prices for used cars. This segment accounts for more than a third of the total price growth. Over the past 12 months, prices for used cars have increased by more than 10%. According to economists, prices for supported cars are rising due to high consumer demand, as well as due to limited supply. The lack of computer chips necessary for building cars also played a role.
There is no doubt that the record inflation growth is largely due to the effect of the low base of last year. But at the same time, the price pressure is gradually expanding, increasing the "hawkish" expectations on the part of many traders. Yesterday's release only strengthened these expectations.
Will Jerome Powell be able to convince the markets? This is an open question. Given his previous speeches, it can be assumed that he will voice out a dovish rhetoric today. But since traders are mostly set up for a "soft mood", any hawkish notes will put significant pressure on the EUR/USD pair. In this case, the pair will break through the support level of 1.1780 and head to the base of the 1.17 level. However, it is best for now to take a wait-and-see position for the pair.