FX.co ★ Yellen's statement surprised the currency market

The financial markets were shocked after US Treasury Secretary J. Yellen said this weekend that it would be a huge gain if interest rates were higher by the end of this year. There are now discussions in the professional environment about when the Federal Reserve can actually begin the process of normalizing monetary policy.

What is driving investors to discuss this topic, and when can the US regulator really begin to implement these actions?

The main reason for the growth of such expectations is the sharp rise in inflation to 4.2% in April, which has already exceeded its noticeable increase in September 2011 to 3.8% and is approaching the value of September 2008, when the value of consumer inflation surged to 4.9%.

The market believes that the Fed may decide to start ahead of events against the background of not just a jump up in inflation, but also the desire to prevent a sharp increase in it, as it was in 2013. There is an assumption that by the end of the summer, the regulator will make it clear at one of its meetings or at a press conference by J. Powell that the decision to start reducing the volume of government bonds is almost near.

We believe that if the growth of inflation continues or stays for a long time near the current values, then the Fed Chairman will most likely announce the specific dates for the start of the process of monetary policy normalization during the September meeting or simply in some interview this month. This will start with the process of reducing the volume of treasury purchases from January next year.

So far, US government bond yields are not responding to market participants' fears. Today, the yield of the benchmark 10-year treasuries is even declining by 1.06%, to 1.553%, reaching a local low of May 26 this year. At the moment, there is no sign that investors in US government debt are afraid of anything. We believe that the market will really react with noticeable movements after the publication of new data on US inflation, which will be released this month.

The US stock market is consolidating near recent highs on the back of recent events and Yellen's statement, supported on the one hand, by unprecedented high volumes of dollar liquidity, and on the other, held back by concerns about the Fed's unexpectedly earlier decision to start normalizing monetary policy. We believe that the current situation in the American stock market will dominate in the near future.

Based on the dynamics of the ICE index, the US dollar continues to hang around the level of 90 points in the currency market. We believe that this condition, namely the dynamics of the US dollar against major currencies, will not change anytime soon.

In terms of the interesting economic data that will be released today, we will highlight the values of the Eurozone GDP for the 1st quarter, the figures of the ZEW economic sentiment index in Germany, the volume of exports and imports, as well as the number of open vacancies in the US labor market.

Forecast of the day:

The EUR/USD pair is trading above the level of 1.2175 in anticipation of the release of Eurozone GDP data and the economic sentiment index from the ZEW in Germany. It should be noted that positive values from the indicators can only temporarily raise the pair. If they turn out to be worse than expected, especially the economic sentiment index from the ZEW, this may lead to a local decline to the level of 1.2100 after overcoming 1.2175.