FX.co ★ The dollar toss: What if the Fed is wrong

Inflationary pressures are growing in Europe. The euro reacted with strengthening to the rise in consumer inflation in May. The largest jump was noticeable against the pound, and the euro also rose in price against the dollar, but not so much. The EUR/USD pair first jumped to 1.2241, then retreated from the local high on Tuesday.

At the moment, the upward trend in the pair remains relevant. Over the past two months, the euro has gained more than 2% of its value, breaking into the bull market zone. The quote shows hopes for growth with a target of 1.2300, but stability above the support level of 1.2170 is important for this.

Meanwhile, the euro may face obstacles in the future. The Fed may hinder the continued upward trend, or rather, there is a talk that the regulator at the next meeting will signal the markets about the upcoming curtailment of the stimulating policy.

Such expectations were provoked by the speeches of a number of representatives of the American regulator. Although the hawks are outnumbered, market players have caught on to their words because they believe the time has come for the Fed to act.

This implies a stronger dollar, but also a decrease in the money supply due to a possible reduction in the volume of purchases of bonds ahead of the announced date.

Bears on the dollar have become wary and are unlikely to aggressively sell the American currency. The upcoming June 16 meeting will be examined, as they say, from cover to cover for any, even the most insignificant, changes in rhetoric. However, no matter how much the markets want it, it is unlikely that a decision will be made to start curtailing the stimulus program at the June meeting. This would be too abrupt a transition and could hit the markets hard. The Fed should not allow this to happen.

The US economy still lacks more than 8 million jobs, and the surge in inflation at the Fed is called a temporary phenomenon. In this regard, traders are interested in the speeches of the FRS representatives L. Brainard and R. Quarles. Market players will consider the "dovish" rhetoric for the Fed's inclination to continue the stimulating policy in the same volumes, which will put pressure on the dollar.

If investors notice even a drop of doubt, the dollar will receive a new impetus to strengthen. So far, the dollar index chart is not encouraging. Although on Tuesday, during the hours of the American session, the dollar began to show signs of life again. It will continue to retreat from its 5-month low on Wednesday.

The growth of the dollar against a basket of similar currencies is likely due to the publication of data on the US manufacturing sector, which grew stronger than expected.

The American currency is definitely in the spotlight right now. Its throws are associated with uncertainty. Market players are divided over whether the current inflationary pressures will be temporary, as the Fed says, or will persist long enough for policymakers to cut stimulus and raise rates ahead of time.

In general, market players are leaning towards the weaker US currency. MUFG Bank believes inflation will not last long, especially as pressures from higher energy prices are beginning to dissipate. Analysts are not expecting a rate hike until 2024. This means that the dollar will weaken by the end of the year.

Meanwhile, the Bank of England began to give monetary signals, causing the pound to hit new highs on Tuesday.

Last week, the Bank of England spokesman allowed a rate hike next year or earlier if the recovery from the pandemic goes faster. On Tuesday, his words were reinforced from the very heart of the Central Bank. Deputy Chairman Dave Ramsden made it clear that if inflationary pressures persist, the regulator will raise the rate. Thus, they opened the way up for the pound.

As noted in the MUFG, current events speak in favor of strengthening the pound. The GBP/USD pair, with further positive developments, will go to the assault on the 1.4500 mark.

Nevertheless, the quote has not yet managed to get out of the sideways range of 1.4238-1.4095, which is very important for further forecasting.

In the GBP/USD pair, bearish sentiment may intensify in the event of a breakdown of the support level of 1.4145, and then the mirror level of 1.4137. In this case, the pound risks sinking to 1.4060.

The bullish scenario will be activated again after the breakdown of the resistance level of 1.4163. Further, buyers will be able to carry out the quote to the level of 1.4233.