US stock indexes ended Wednesday with multidirectional dynamics.
At the same time, the S&P 500 and Dow Jones fluctuated between growth and decline, closing below the previously reached local highs.
The main reason forcing investors to be cautious is uncertainty about how long high inflation will continue in the country, which is growing at the fastest pace in the last 13 years, and how the Federal Reserve will react to this.
Another negative factor is the spread of the new COVID-19 "Delta" strain around the world. The incidence of coronavirus is also growing in the United States.
A similar picture is observed in the foreign exchange market, which, according to National Australia Bank strategists, is still on an uncertain path.
The USD index has been trading in the range of 92.00–93.00 since the beginning of July.
For a confident breakthrough to the upside, the dollar needs official signals from the Fed about the imminent reduction of QE.
To return the greenback to a decline, as analysts at Saxo Bank note, confirmation is required that the curtailment of the Fed's accommodative measures will fall behind changes in the corresponding fundamental indicators, namely, real yields in the United States and the country's current account deficit.
Some leading central banks are already taking steps to normalize monetary policy, and investors are wondering whether the Fed will follow their example.
On Wednesday, the Reserve Bank of New Zealand surprised market participants with a sudden curtailment of the asset repurchase program.
The Bank of Canada also reduced monetary stimulus, but the adjustment was much more modest compared to the RBNZ.
As for the US central bank, according to analysts, it now looks like the fastest turtle in the race for monetary tightening, trying to convince market participants that you get results over time in a long game.
On the one hand, the fact that Fed Chairman Jerome Powell still believes in a natural slowdown in inflation in the United States suggests that the adjustment of the monetary policy of the central bank is still far away. On the other hand, the more the Fed will fall behind its G10 colleagues in this regard, the more aggressively it will be forced to act in the future.
During a speech to Congress, Powell said yesterday that the US economy is still far from the levels that the central bank would like to see before reducing its monetary support.
He added that inflation is expected to remain high in the coming months before falling. And it would be a mistake to act prematurely.
The latest statistics on US inflation calls into question the assertion of the Fed's management about its temporary nature.
On Tuesday, the US Department of Labor released data according to which the country's CPI in June showed an annualized growth of 5.4%, which is the highest since August 2008.
While the fact of mounting price pressures did not come as a surprise to anyone, the June release reflected the magnitude of the problem. The range of indicators has increased, which means that prices may remain high for longer than previously thought. The likelihood of this scenario is heightened as the problem is mostly related to bottlenecks in supply chains, which are not easy to overcome.
"The recent CPI report demonstrated the continued breadth, strength and stability of inflationary pressure in the United States. Given the acute shortage of inventories and the lack of signs of weakening demand, it is difficult to imagine that this pressure will decrease in the near future," said analysts at Jefferies.
For some investors, the more important conclusion from the recent data on the United States was the fact that the American economy continues to recover at an incredible pace, and may be close to overheating if the Fed does not raise interest rates in a shorter time.
However, in general, the publication of the US consumer price index for June had a relatively modest impact on market sentiment.
"Although expectations for the Fed rate increased by several basis points, and the USD rose in some places, there was no exit from the current ranges in a wide range. It seems that the market is still adhering to the scenario according to which the US central bank is cautiously moving towards tightening monetary measures, which will cause it to fall behind other central banks," Saxo Bank experts noted.
"The main test of such sentiments will be the FOMC meeting, which will be held in two weeks. If it shows more confident plans of the Federal Reserve to reduce QE, it will send risky assets down and the dollar up, " they added.
The greenback was forced to retreat from the 92.80 mark for the second time in a month after Powell spoke in his own style and confirmed the central bank's commitment to a patient stance.
In fact, he did not provide the market with new information, but gave a reason for taking profits on USD.
Powell's cautious comments helped the EUR/USD pair recover from three-month lows.
However, it is obvious that the Fed is closer to normalizing monetary policy than the European Central Bank. Given the growing inflationary pressure in the United States, the Fed will have to start curtailing its stimulus policy sooner or later.
Earlier this week, ECB President Christine Lagarde announced that changes to the current rate of the central bank are expected in July.
Saxo Bank believes it is unlikely that the meeting of the ECB's Governing Council, which will be held next week, will be hawkish.
Analysts admit that the ECB may begin to reduce the emergency bond purchase program (PEPP) after the September meeting.
However, the main risk for the implementation of such a scenario is the spread of new COVID-19 strains in the EU.
"Judging by the current monthly pace of asset purchases by the ECB, according to our forecast of a gradual decline in these rates starting in October and in the remaining time until March, the entire volume of PEPP in the amount of €1.85 trillion will be fully used," Berenberg analysts said.
"In addition, the vaccination campaign in the eurozone should be almost completed by September. But if new variants of COVID-19 can bypass the protection from current vaccines, the resumption of social distancing in the region will again damage the economy," they added.
On Wednesday, the EUR/USD pair reached the lowest levels since the beginning of April in the area of 1.1770, from where it rebounded sharply. It tried to continue to rise on Thursday, but faced strong resistance in the area of 1.1850.
"The rebound looks excessive, and the pair is unlikely to continue to strengthen significantly. At the same time, the rapid loss of the bearish momentum indicates that the pair is not ready to decline. Most likely, it will be traded for some time between 1.1770 and 1.1895, " UOB analysts believe.
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