Euro rose amid a stock market crash yesterday. Apparently, many traders closed positions because they expected the Fed to take more aggressive measures to curb inflation. In addition, technical analysis showed that dollar has been heavily overbought.
Experts have shifted the blame onto the shoulders of US President Joe Biden as his $ 2 trillion tax and expenditure bill will most likely boost inflation next year, provided it gets passed by Congress. Many have concluded that the bill, in its current form, will increase inflationary pressures in the short term, but opinions differ on how alarming this would be for the economy.
As such, Democrats continue to discuss the details of the bill, while some moderates are expressing concern about its impact on the economy. Its approval threatens much higher inflation, which is already in the region of 30-year highs. Republicans also criticized the bill and called it wasteful.
But Biden and his administration believes that the bill will have a positive effect on reducing inflationary pressures in the longer term, and this will happen by increasing the size and productivity of the US workforce. It is not for nothing that the Fed is trying to contain the cuts in stimulus measures until the labor market has completely recovered. Seeing improvement in employment will significantly reduce inflationary pressures.
According to the latest data, jobless claims in the US fell to 268,000, down 1,000 from last week. But even though there was a decrease, the figure is still higher than what economists expected.
Still, many bank on a continued recovery in the labor market, despite fears of another COVID-19 outbreak. Employers are facing some shortage in the number of workers, so it is likely that there would be less layoffs in the US.
The Department of Labor also indicated that the less volatile four-week moving average fell to 272,750, down 5,750 from the previous week. The number of people receiving permanent unemployment assistance also fell 129,000 to 2,080 million, the lowest level since March 2020.
Going back to inflation, growth has already spoiled consumer sentiment, but the upcoming Black Friday and Christmas sales may help this component. Sadly, discontent with Biden will most likely continue, as evidenced by recently-released opinion polls. This forewarns that the Democrats may lose a majority in the Senate.
Economists at JPMorgan also said they now expect more active action from the Federal Reserve, such as raising interest rates as early as September next year. They also said the central bank's full-employment target will be met by mid-next year, so it is time to think about more aggressive roll-off of stimulus.
Meanwhile, Goldman Sachs economists said they expect the central bank to increase rates in July, the same as what former Fed politicians noted this week.
With regards to loans, the average rate on 30-year mortgage loans rose to 3.10%, indicating the people's preparation for when the Federal Reserve starts tapering stimulus. The main driver of the gain is increased housing prices.
Talking about EUR/USD, a lot depends on 1.1335 because a breakdown will lead to a rise to 1.1380 and 1.1420. Meanwhile, a further drop below the level will result in a decline to the base of the 13th figure, and then to 1.1265 and 1.1220.
British pound (GBP)
Pound went down yesterday amid bad news in the UK. It followed a two-day rally brought by strong statistics in the labor market and inflation.
According to reports, the UK remains steady in its plan to suspend some parts of the Northern Ireland Protocol if the European Union refuses to comply with its requirements. "We have not backed down from the idea of initiating Article 16," said Northern Ireland Secretary Brandon Lewis. "We are currently focused on negotiations to try and find a solution, but it is also very clear to us that this cannot go on forever." The remarks came after the European Commission said they do not believe that the UK will abandon the Northern Ireland part of the Brexit deal. Negotiations between the two sides will continue today.