The minutes of the Fed meeting brought relief to equity investors as the US Central Bank made it clear that it acknowledges the fact that inflation is accelerating, but is not going to suppress it by easing QE, what could harm risk assets. Before the release of the Minutes factor of risk for stock markets was the uncertainty associated with what the Fed thinks about clear signs of inflation in the US both in the financial market (in the form of an increase in inflation premium in bonds) and in certain consumption segments like housing market where prices have been rising with the fastest pace in 30 years. The Fed discounted substantial inflation pressure in house prices, signaling that it does not see overheating in the market.
The US retail sales report for January came as a big surprise for investors, as it indicated growth of the key component of consumer spending by 5.3% against the forecast of 1.1%. Earlier, I wrote that consensus about the retail sales reading tends to underestimate growth, since in early January, American households received stimulus checks from the government, the stimulating effect of which was difficult to calculate. Gold fell on the report, while the dollar rose.
The Fed's stance in monetary policy implies that it isn’t going to tamper growth of long-maturity bond yields. It means that the outflows from Treasury market may continue to fuel demand for the US currency. However, strong growth in retail sales is a clear signal that the world's largest economy is growing well, which means that the theme of yield hunting remains valid. This has negative implications for the USD.
The technical picture for USD is as following:
After rising to 1.30%, the yield on the 10-year Treasuries show signs of stabilization. Stock index futures in the US are trading in moderately negative area, so all in all the demand or USD today gradually weakens. EURUSD is likely to consolidate in the 1.20-1.21 channel with a probable test of the 1.21 level. Lack of progress on vaccination pace in Europe is the main obstacle to appreciation of the European currency. As soon as the situation in this direction starts to improve, the European currency should be able to resume strengthening against the USD.
Regarding GBPUSD, we also see a moderate correction after flirting with vicinities of 1.40 level. The forecast for the British economy is being consistently revised, in addition, the Brexit risks are in the past. Therefore, the Pound is returning to its fundamental value and the test of the 1.40 level, in my opinion, is only a matter of time.
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