The Fed is trying to present inflation to investors in a completely different way from how the authorities do in relation to the pandemic. The higher the number of people infected with COVID-19, the scarier the headlines in the media. The higher consumer prices rise, the more phrases about the temporary nature of their acceleration are heard from the camp of the Federal Reserve. First, FOMC officials talked about the peak of the core CPI in May, then in June, now in July. Let's see what happens in fact, but in any case, the release of US inflation data is the key event of the week of August 13.
The Fed's dual mandate assumes that monetary restriction will only occur if both the personal consumption spending index and unemployment reach the required levels. According to FOMC member Christopher Waller, two strong labor market reports are required to start the tapering of QE. The growth of employment by 800,000 to 1 million per month is a signal of the imminent start of the normalization of the Fed policy. Inflation has long been at elevated levels and is a concern for Congress. However, the Central Bank is independent in its activities and is unlikely to react to the panic of legislators.
In theory, if the US economy grows faster than Europe, and the ECB, unlike the Fed, does not think to get rid of QE, EUR/USD quotes should fall. Unfortunately for the "bears", the peak is being held back by the unwillingness of Treasury yields to rise. This narrows their spreads with their Japanese counterparts and forces investors from Japan to return capital to their homeland. As a result, the yen is strengthening.
Despite some reduction in short positions on US debt, net shorts are still at higher levels, which is hampering yield growth and hindering the US dollar.
Dynamics of speculative positions and US bond yields
Rates on European bonds are falling. German 30-year bond yields tumbled into negative territory, while 10-year bonds hit the lowest level since February. At the same time, history shows that the exit from QE leads to an expansion of the differential rates on debt obligations of Italy and Germany, which is extremely undesirable for the ECB. Based on this, we can conclude that the European quantitative easing program is serious and is long-term.
Dynamics of the differential yield of European bonds
In such conditions, only a very weak report on the US labor market for July can lead to a serious correction of the EUR/USD. In this scenario, the risks of the Fed's refusal to normalize monetary policy and the Central Bank's return to passive contemplation will increase, which kept the US dollar under pressure in the first half of 2021. If the employment statistics turn out to be close to the forecast of Reuters experts of 870,000, you can stop doubting the strength of the downward trend for the main currency pair.
The strategy of selling EUR/USD below 1.1875, which was technically stated in the previous article, brought profit. I don't think we should forget about the transformation of the Shark pattern into 5-0. We continue to sell the pair on the rebound from the resistance or on the breakout of the supports at 1.178 and 1.1755.
EUR/USD, Daily chart