The U.S. dollar is strengthening against the euro after U.S. inflation showed a lower rate of decline yesterday, and members of the Federal Reserve spoke quite hawkishly, signaling an extended hike cycle. In addition, the leader of the Republicans, McDonell indicated yesterday that the party would not stand in the way of raising the debt limit thus lowering the risk of a US 'default'. A slightly more dovish message from Patrick Harker, head of the Philadelphia Fed, was balanced by hawkish Thomas Williams, head of the New York Fed.
Biden's choice
Start investing today or test a free demo
Create account Try a demo Download mobile app Download mobile appJoe Biden has appointed Jared Bernstein and Lael Brainard to key economic posts. Bernstein, who in the past has leaned toward 'Modern Monetary Theory,' an economic theory that considers near-zero interest rates appropriate, will become the White House's chief economist. Brainard, a Fed deputy governor known for her more dovish stance, will now be the president's chief economic advisor.
In the past, Brainard has emphasized the 'two-sided' risk of rate hikes, and has often focused more on it than on controlling inflation. If nothing changes, we can assume that in view of the slowing economy, Brainard will speak in favor of rate cuts even if inflation does not reach the 2% target. Source: Reuters
Fed Harker
- We need to be cautious about rate hikes during balance sheet reduction but should maintain the path of 25 bps rate hikes;
- The Fed is not yet finished with the hike cycle but is probably close. Deciding in March is not yet a foregone conclusion;
- How much rates will rise above 5% will depend on the data. I see little evidence of a serious slowdown in the labor market but I think unemployment will rise above 4% this year
- The inflation report showed that inflation has stopped falling rapidly. I forecast core inflation around 3.5% this year, 25% next year and 2% in 2025
- I forecast 1% real GDP growth this year before the economy returns to 2% growth in 2024 and 2025. I do not forecast a recession
Fed Williams
- There is a possibility that the Fed will have to raise rates higher than I predict, and inflation will still remain higher;
- I remain confident that the 2% inflation target will be achieved but the struggle to do so may take several years;
- I expect core PCE inflation to be 3% this year. Perhaps the Fed will cut rates in 2024 and 2025 but only if it is prompted by low inflation;
- The main concern is that high inflation is rooted in social expectations. Higher global growth and constrained supply chains are pro-inflationary - supply and demand imbalances drive inflation;
- The Fed may have a long way to go when it comes to controlling price pressures. Lower growth and higher unemployment will result from lower inflation this year. I estimate that unemployment will rise to 4-5%;
- Recent data support the case for additional rate hikes and show improvement in underlying economic strength. Labor market remains exceptionally strong
EURUSD broke the trend line, the pair settled below the 100 and 200 session averages (black and red line) on the H4 interval, signaling a possible further weakening of the European currency against the dollar.
Source: xStation5
The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.