20.05.202111:42 Forex Analysis & Reviews: Possible early easing of bond purchases raises demand for US dollar

US Treasury Secretary Janet Yellen has previously called on the business community to support the Biden administration's planned tax increase. However, almost everyone remained indifferent to it, as business owners know that the hike will only disadvantage their companies, not to mention harm US workers. In fact, according to Suzanne Clark, president of the US Chamber of Commerce, now is not the right time to build new obstacles to economic recovery. Clarke said she supports investment in infrastructure, but prefers this to happen at the expense of standard tax levies, not raising the corporate tax.

Yellen said the increase will fund Biden's $ 2.25 trillion proposal, which is aimed to develop labor, infrastructure and environmental technologies.

But many are against this move, including National Retail Federation (NRF) spokeswoman Mary McGinty and Retail Industry Leaders Association (RILA) spokeswoman Melissa Murdock. This suggests that the business sector is not ready to share their income for the benefit of economic recovery, especially when corporate tax is going to jump from 21% to 28% at once.

On a different note, the Federal Reserve published the minutes of its last meeting yesterday, which indicated that the central bank may reduce the volume of their bond purchases in the near future. In fact, the Fed said the decision may come during the next meetings, although they also reminded that the US economy is still far from its goals. Dollar demand rose because of this news.

As for Europe, the European Central Bank released positive economic projections, claiming that the situation is now more balanced than before. Growth is expected to pick up in the coming months, thanks to improving vaccination rates in all European countries. But the ECB warned that if Treasury yields jump, bond prices will decline, which will weaken the balance sheets of regional banks that have suffered from low profitability for a long time.

At the same time, inflation in the bloc has accelerated, but the figure is still beyond the target of the central bank. Hence, demand for the euro declined, although in the afternoon, bullish traders managed to win back some of the losses.

The report said inflation this April hit a two-year high, thanks to much better energy prices. It climbed to 1.6% year-on-year, and by 0.6% month-over-month.

As for core inflation, a drop to 0.7% was observed, instead of to only 0.8%, which analysts had projected. But the numbers should improve in the next months, as the EU economy will certainly continue its growth.

With regards to the US, analysts predict inflation to rise to 2.5% in the second half of 2021, and then decline the next year.

In view of this, a lot depends on 1.2150 today as a break below it will push the euro even lower, plausibly towards the 21st figure. But if bullish traders manage to regain control of 1.2199, the euro will be able to jump to 1.2245.

GBP

UK CPI for April exceeded expectations, having jumped 1.5% year-on-year, thanks to rising energy prices. Analysts predicted a rise of only 1.4%.

Obviously, the figure is still beyond the 2% target of the Bank of England, but members are confident that it will hit and exceed such level by the end of 2021. More specifically, they predict that inflation will reach 2.5% in 2021, and then return to 2% in 2022. The Federal Reserve is following a similar scenario.

And although the risks of a serious inflationary jump remain, analysts forecast that interest rates will change only by 2023.

On a different note, home prices in the UK jumped 10.2% year-on-year, which is the largest growth recorded in the last 14 years. The average price of detached properties increased by 11.7%, while the price of apartments rose 5.0%. The average home price reached £ 256,000, which is £ 24,000 higher than the same month last year.

In view of this, a lot depends on 1.4080 as a break above it will result in a larger jump towards 1.4150. But if the quote breaks lower than the level, pound will collapse to the bottom of the 40th figure.