09.04.202111:40 Forex Analysis & Reviews: The dollar will play on the nerves of the Fed

The rapid growth of EUR/USD quotes in early April amid the third wave of COVID-19 in Europe, confusion with vaccines, a double recession, and problems with foreign trade due to Brexit looks like tools for someone's benefit. The decline in US Treasury yields has brought tech stocks back to life and allowed the S&P 500 to rewrite all-time highs for the 19th time since early 2021. The dollar lost its main trump cards, which was immediately taken advantage of by the fans of the euro. How long will this go on?

Everyone knows that the economy develops cyclically. Downturns are followed by upturns, and upturns are followed by downturns. As a rule, recessions occur because central banks took the punch bowl during the feast - they begin to raise rates, fearing an overheating of the economy. This has continued for centuries, until not so long ago, the Fed decided that it would tolerate high inflation and target the average. The central bank is ready to allow the economy to overheat, but financial markets were not ready to change its policy. They are used to living in the old way. That is why investors began to test the Fed's strength, actively selling bonds in March and signaling the first increase in the federal funds rate at the end of 2022.

At the heart of the debt sales is the idea of accelerating inflation, which the Fed strongly dismisses. In its opinion, the surge in PCE will be temporary. In the week to April 16, the market will have another reason to play on the nerves of the Central Bank – according to the consensus forecast of Bloomberg experts, consumer prices in the United States will accelerate from 1.7% to 2.4% YoY. The dynamics of the cost of gasoline suggest that this is nothing.

Dynamics of gasoline prices and US inflation

Typically, CPIs rise slightly faster than the Fed's Personal Consumption Expenditure (PCE) index. But what will happen if one or both indicators soar to 3.5% in the medium term? Will the regulator continue to be as patient as it is now, or will there be no trace of its desire to sit on the sidelines for a long time? In any case, due to the release of March inflation data, the market has an opportunity to play on the Fed's nerves again, and, most likely, it will take advantage of it.

A resumption of the rally in Treasury yields will lead to a sell-off in tech stocks, an S&P 500 correction, and a return to investor interest in the US dollar, which will not favor the euro. However, you need to understand that the regional currency is no longer the whipping boy as it was in March. Belief in accelerated vaccination, COVID-19 retreat, and opening of the economy is gradually fueling rumors of a recovery in the EUR/USD upward trend.

Technically, on the daily chart of the analyzed pair, there is an implementation of a small Wolfe Wave pattern. A breakout of the resistance at 1.1935 will increase the risks of implementing its targets at 1.2 and 1.2035 and will become a signal to buy EUR/USD. However, the bulls will likely not have enough strength for this. At the same time, a drop in quotes below 1.186 is fraught with a continuation of the peak to 1.18 and 1.176.

EUR/USD, Daily chart