Since January of the current year, the money supply M1 in the Eurozone has exceeded $ 12.6 trillion. At the same time, in the United States, this monetary aggregate has grown from $ 6.7 trillion to more than $ 18.6 trillion. The consequence of this was the acceleration of inflation in the United States and GDP growth, which exceeded 6% in the first quarter. At the same time, unemployment in both the United States and Europe continues to be prohibitively high.
Regarding the labor market in the United States, it is important to note that many experts agree that the unemployment rate in the country is much higher than the official values. It is enough to pay attention to the American Unemployment rate U6, which takes into account, among other things, residents of the country, for example, who are not currently looking for work. This indicator for the month of March exceeded 10.5%.
In these conditions, the United States is undoubtedly under the threat of stagflation, leading to periodic drawdowns of the American currency against the euro, which means that now, more than ever, the indicator of the number of employed Nonfarm is acquiring one of the key values. In November and December last year, amid a fall in the NFP, an increase in the consumer price index, including accompanied by a slowdown in consumption (retail sales in November and December fell by 1.5% and 1%, respectively) and political uncertainty, the US dollar lost about 6 .5% (EUR / USD rose from 1.1600 to 1.2350).
In April of this year, the worsening situation with the COVID-19 pandemic was added to the growth of inflationary expectations. According to data from Johns Hopkins University, in early April, the average number of infections in the United States again crept upward. By April 13, the average number of infections in 7 days exceeded 71 thousand. This allowed the euro to rise again against the dollar – the EUR / USD pair again surpassed the 1.2000 mark.
Thus, now the movement of the pair is determined by several key factors, namely:
1. US unemployment rate
This is currently one of the main risks for the economy. And here it is worth recalling Biden’s plan to raise the corporate tax from 21% to 28%, as well as the abolition of incentives for limited liability companies. In my opinion, this can have certain negative consequences for the labor market, since an increase in the tax burden can force corporations to reduce their operating costs, including by optimizing their staffing levels, i.e., in other words, laying off people.
On the other hand, the increase in cuts, most likely, will force Congress to continue to take anti-crisis measures in the form of additional financial injections, which may again begin to accelerate inflation.
2. The situation with COVID-19
By far the most difficult factor to predict right now. Obviously, the surge in confirmed cases, the discovery of new strains of the virus and possible problems with vaccinations will weigh on the dollar.
3. Inflation and inflation expectations
Despite the release of the consumer price index to the 2% target, it can be noted that the Fed is still in no hurry to move to a restrictive monetary policy. At the last meeting of the open market committee on Wednesday 28.04, the statements made can be rather classified as standard:
- The Fed will adhere to a policy of low rates even if inflation exceeds the 2% target. At the same time, the committee expects that such a jump in inflation will rather be a temporary phenomenon.
- Quantitative easing will continue
With all this, we are already hearing from individual committee members hints of an imminent course change. So, recently the head of the Federal Reserve Bank of Dallas R. Kaplan said about this, who announced that there was an imbalance in the market, which could force the Fed to reduce stimulus. According to a BBG poll, QE will begin winding down in the 4th quarter of this year. As I already wrote, for the EUR / USD pair, it will be enough just a small change in the FOMC rhetoric in order to start moving in the opposite direction.
Now let’s look at the technical factors that affect the exchange rate.
Technical analysis of the EUR / USD pair
Time frame: 1 month
In this time frame, the price moves in a sideways trend. The range is wide enough. The support level is located at 1.1600; the resistance cluster is in the range 1.2350 – 1.2550. Currently, the EUR / USD pair is approaching the upper border of the range – in case of a breakdown of the upper cluster, the euro has a chance to reach 1.3500 – 1.4000. In case of a breakdown of support, the next level is at the lows of 2015-2017. – i.e. 1.0500 – 1.0520.
Time frame: 1 week
The price moves in a growing price channel. The lower border of the channel is at 1.1800. In January of this year, the price reversed from 1.2350 and a local corrective movement began to form with the formation of highs at 1.2240 and 1.2150. I think that now there is a high probability of a return to the lower boundary of the 1.1800 channel, a breakdown of which will mean an exit to 1.1600.
Time frame: 1 day
On the daily time range, the price broke down the trend line and at the same time broke down the 23.6% Fibonacci retracement level. (1.2045). I think that now, with a fairly high degree of probability, the price can correct by 50% of the local bullish trend, i.e. test the 1.1930 mark.
Conclusions: I do not believe that the EUR / USD pair will be able to overcome the 1.2350-1.2550 range. Despite all the risks involved, the chances that the Fed will move to a restrictive monetary policy in the coming year, in my opinion, are quite high. The gradual curtailment of QE and a further increase in the discount rate should have a positive effect on the US currency, which means that the dollar has every chance of resuming its growth.