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#1 14-01-2021 09:07:13

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: America's growth rate, and its weight on the USD

EUR/USD: America's growth rate, and its weight on the USD


The U.S. dollar took a hit on Tuesday during the New York session. It traded in a buying tone throughout the London session, only to sell aggressively once the New York session opened. The EUR/USD pair went from 1.2129 to over 1.22, the AUD/USD from 0.7689 to 0.7769 etc.

Several factors contributed to the fall of the USD. The first is the stability of the stock market which is keeping trading near its historical highs. The other is the remarks of Fed member Brainard who reminded everyone of the Fed's Average Inflation Targeting (AIT) and the exponential rise in the US M2 money supply in response to the coronavirus crisis.

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Fed members and their speeches

Every few weeks, on a Wednesday during the second half of the U.S. trading session, the Fed issues its Federal Open Market Committee (FOMC) statement. This statement is often followed by a press conference at which the Fed Chairman highlights the information contained in the statement and answers questions from the public. As a result, the volatility of the US dollar reaches extreme levels.

Between FOMC meetings, the Fed has different ways of guiding the market. One of them is the FOMC minutes, published 21 days after the FOMC meeting, which show how the discussions took place at the previous meeting, what the topics were, whether there was unanimity in the decisions, who disagreed, how many doves and how many hawks are present on the committee, etc. The minutes are published in the FOMC minutes.

The voting members of the Fed also have to speak between meetings. This is important for two reasons: there are a lot of Fed members and every week there is at least one speech or intervention by a Fed member. For example, Brainard is a voting member, so the market takes his words accordingly. Also, later in the day, he will speak again, as will Clarida, another voting member of the Fed.

Market participants were reminded Tuesday that the Fed has shifted its mandate to the ICA and will allow inflation to rise above 2%. The US M2 money supply, which currently stands at +25% on a 1-year exchange rate basis, is more than 3 times the long-term growth rate, leading to higher future inflation expectations.

The market's reaction is therefore quite understandable, as the dollar has taken a hit across the board. This is not the first time that a member of the Fed, other than the Fed Chairman, has moved the markets - nor will it be the last time.

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