As FOMC Meets, Forex Market Stays Calm; Inflation Increases Severely

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Markets will be watching the FOMC statement and projections for fresh information this week. The American session is fairly quiet today, with few reactions to the G7 conference. China and Hong Kong are also celebrating a one-day holiday. Commodity currencies are firming slightly, while the Swiss Franc and the Yen are weakening. All major pairs and crosses, on the other hand, are trapped within Friday’s range. 

The direction of most pairings and crosses in the forex markets is not very evident from a technical standpoint. One concern is whether the Dollar will have more long-term recovery. However, some levels have to be removed first for us to have more assurance in it. GBP/USD support is at 1.4072, AUD/USD support is at 0.7644, USD/CHF resistance is at 0.9052, and USD/CAD barrier is at 1.2201.

ECB President Christine Lagarde said in an interview with Politico: “You do not remove the crutches from the patient until the muscles begin to recover enough to allow the patient to walk on their two legs.”  

“It’s the same in economics,” she added. “We are at a pivotal stage where, with alternatives in mind, we are on a recovery path, firmly on track to return to pre-COVID-19 levels.” 

FOMC Preview: Is It Too Soon To Taper?

At this week’s meeting, we don’t expect the Fed to discuss tapering. Policymakers are expected to give more details at the Jackson Hole conference in August, with a formal announcement coming at the FOMC meeting in September. We’re more interested in hearing its thoughts on the fast rise in both headline and core inflation at the next meeting. The central bank would also release the most recent economic forecasts as well as median dot plots.

In terms of economic development, the labor market and inflation have changed significantly since the last meeting. The employment situation also surprises with the reverse side. Although the unemployment rate in May fell by -0.3 percentage points. up to 5.8%, the number of jobs increased by +559 thousand. Compared to the forecast of +650 thousand. Although, it still improved compared to the addition of +278K in April.

However, inflation has accelerated. The general consumer price index rose to +5% y/y in May from +4.2% a month ago. The market expected growth to +4.7%. Excluding food and energy prices, the core CPI accelerated to a 3-year high of +3.8% y/y from +3% in April.