FX.co ★ Fed's threats (EUR/USD and GBP/USD review on March 5)

The euro's decline is completely logical and understandable at first. After all, European retail sales collapsed, which means that the next events are expected to unfold based on the disappointing scenario. However, the markets strangely ignored the macroeconomic statistics, both from Europe and the US. Despite this, the Euro currencies still made a sharp decline after all kinds of statistics were published. The reason lies in Jerome Powell's speech. The Fed Chairman clearly told a lot of interesting things about the instability of the economic recovery and all kinds of risks. However, all this is nothing compared to his words that the Fed is paying attention to the unpredictable fluctuations in the currency markets. In other words, Jerome Powell said that the markets are clearly breaking away from reality. And although they persistently ignore macroeconomic statistics, it is time to face the reality.

If the Fed makes such hints, it means that we should be prepared to be taken down by their actions in the form of tightening the regulation and supervision of financial institutions. In any case, such actions will lead to an outflow of capital from around the world towards the US, since American investors control most of the financial capital. Moreover, any tightening of monetary policy leads to an increase in the yield of government debt, making them more attractive. However, the whole point is that currency markets are separated from reality, which is confirmed by Jerome Powell through the markets' reaction.

In conclusion, no one can be eternally idealistic. It is necessary to go back to reality sooner or later. And if no one wants to do it on their own, then reality will inevitably make itself felt over time. It's usually like slipping into a concrete floor. After all, you can dream as much as you want about tropical islands, sandy beaches and a transparent sea surface, with colorful fishes swimming, but if one convinces themselves that this is how the world really works, then the actual life will be lost. This is the moral of Jerome Powell's speech. He is like a doctor who is worried about the life and health of his patients, hinting that if you do not come to your senses, then it is unavoidable to be hospitalized.

So what happens in this reality? As soon as European inflation is replaced by deflation, retail sales will immediately collapse – their growth by 0.9%, will fall as much as -6.4%. If you make a simple calculation, companies' profit or rather sellers, will sharply decline around 5.5%-5.6%. This will happen immediately from the moment consumer prices began to rise. At the same time, Europe's inflation rate will be very low, making the consumer demand extremely weak, unstable and can only grow in the face of lower prices. However, manufacturers are not interested in producing products whose price is constantly falling, as its profit does not rise. This means that there is no point in investing in development and creating new jobs or raising wages. The situation is really depressing, and logically, the market should have reacted to this with an immediate plunge in European currencies. However, the markets are currently living in their own parallel world. It is possible that the only thing that could please was the unemployment rate, which remained unchanged in Europe, albeit expected to rise from 8.1% to 8.4%. However, it can be seen that this is already a high unemployment rate.

Retail Sales (Europe):

As for the United States, they further confirmed that the US labor market continues to recover. The total number of repeated applications declined from 4,419 thousand to 4,295 thousand, although the number of initial applications for unemployment benefits rose from 736 thousand to 745 thousand. However, the overall data came out slightly worse than expected. The total number of applications fell by 115 thousand, against the forecasted 290 thousand.

Number of re-claims for unemployment benefits (United States):

The fact that the applications data came out slightly worse than forecasted, provides risk that the content of the US Labor Department report will turn out to be somewhat different from what is expected. Nevertheless, the unemployment rate and the growth rate of the average hourly wage should remain unchanged. Outside agriculture, 170 thousand new jobs are expected to be created, which is already near the pre-pandemic values. This means that the labor market is slowly returning to normal. And if the markets come to their senses and listen to the words of Jerome Powell, then the US dollar will most likely further strengthen.

Number of New Non-Agricultural Jobs Created (United States):

The euro will most likely decline to the level of 1.1900, while the pound sterling may also do so to the level of 1.3800.