Stagflation is persistently high inflation combined with high unemployment and stagnant demand in a country's economy. In terms of data, we would basically see the same sort of jobs and inflation numbers with no constructive additions for a few months. The USD rotated through the $90-$91 as the markets digested the data releases.
The US dollar is trading above $90 at the time of writing but is looking very fragile, with expectations of the year's major swing lows from February and January to get tested on the US dollar index.
The US monetary policies are the loosest they have ever been, which will be the driving force towards a weaker US dollar. The US general government deficit is at the highest deficit in recent decades, which is combined with the Fed balance sheet at the largest ever. The Fed are unwilling to raise interest rates until sustained, substantial progression is made in the employment data, regardless of what the inflation says. Or so they say,
European vaccination is now progressing fast, but risks remain high until investors see the euro area economy is fully open. The next meeting for the ECB could be when they decide to slow PEPP purchases, which markets could see as tapering and therefore a Hawkish move. The biggest concern for the ECB after COVID-19 is the appreciation of the euro against the greenback.
EURUSD last week tested and held over the near-term uptrend at 1.2071. Currently, significant support is around 1.2000 – 1.1950, which is the previous swing low and the test of the 50-period ema. Traders will look for a re-test of 1.2210-1.2250, and the deep fib retracement of the down move seen from the start of this year, to see if this is significant resistance. If the EURUSD pushes through February’s swing high, the next stop is the years high and 1.2350.
Should the EURUSD turn for the worse and test the low of 1.1986, then we could see the daily period 200 ema as the most significant dynamic support before a complete change in momentum.
For now, the easiest trades will be to the upside, with smaller time frame breakouts, retracements and continuation trades the key to success.
The highlights of this week’s economic calendar include: Euro area ‘flash’ data, Euro area Q1 GDP, Australia employment report, UK employment report, UK CPI, Canada CPI, Japan CPI, and US existing home sales.
The FOMC meeting minutes are released on Wednesday and the ECB financial stability review will be published this week.