FX.co ★ The dollar looks vulnerable, the path to May lows is open

The June FOMC meeting, for the first time in a long time, should play a decisive role in the direction of the markets. Every word and comment will be analyzed and studied from all sides. According to investors, the current situation requires at least some steps or hints on further actions by the regulator.

World stock markets continue to show mixed dynamics ahead of the Fed meeting. There is still an overflow from "value" companies to "growth" stocks. The focus remains on the comments of the American regulator about the temporary nature of inflation and concerns about the wrong policy of the Central Bank. However, investors are more and more inclined in favor of keeping the Fed's soft policy.

If you look at the picture more globally, you can see the similarities with the beginning of the year. In January, there was also a shift in stock markets, which provoked the growth of the Dow Jones to the detriment of the Nasdaq. In addition, an analogy can be drawn with the trend of last year, when there was an outstripping ascent of young companies.

To add to what is happening, there is also a decline in the yields of 10-year US securities, which earlier in June sank to 1.44% from a maximum of 1.76%. Curiously, before that, growth stocks started to heat up when yields started to go above 1.20%.

It is important to understand what exactly is happening here. Perhaps the rotation is related to the strengthening of the economy and favorable prospects for young companies. It may well be a temporary profit-taking in dividend stocks, as it usually happens at the end of half a year.

Most market players associate the latest round of growth in IT-sector shares with speculative expectations that the Fed's leadership will confirm the course of monetary policy softness. Considering the latest comments from the Central Bank members, speculation looks quite justified.

The risks that the Fed will hint at a readiness to wind down the stimulus sooner than the markets are putting in prices now remain. Such a scenario could trigger a large-scale correction in the markets, and we may see a recovering demand for the dollar.

The situation in the US economy suggests the opposite. At the same time, the Fed is unlikely to take any serious steps armed with only positive forecasts, and not real indicators. Therefore, it would be wrong to expect an aggressive mood at the June meeting.

By the way, on Tuesday, a portion of US data was published, which may make the Fed members think. On the one hand, the dollar's reaction to the published statistics was weak, the retail report was not impressive, and the statistics on industrial production were not bad. On the other hand, the Fed still received a signal to improve the indicators.

Retail sales in May decreased by 1.3% overall and 0.7% excluding autos. However, by adjusting the data with an increase in previous months, the decline in retail is not a cause for concern. Note that since the beginning of the year, there has been a sharp acceleration in the pace of retail sales. This did not happen after the last financial crisis after 2008 and has no precedents in history. Strong retail can be added to the piggy bank of a faster rollback of the Fed's stimulus policy. This, of course, is far-fetched, but nevertheless it will not be surprising if the dollar gets support and the stock markets come under pressure.

The dollar index on Tuesday clearly played around the upper border of the range at 90.60, but failed to break it up. If the buyers of the dollar still manage to overcome the level of 90.60, then it will be possible to speak about the subsequent growth of the American currency against the basket of competitors. This cannot be said now. This area limits the dollar's growth, which means that the index may still fall to the May low at 89.50.

The Fed is likely to start discussing the rollback of the quantitative easing program at its September meeting in order to support the dollar, which by then may go below current levels. Thus, the regulator will help the US Treasury to conduct a new cycle of debt buildup after Congress agrees to increase the government debt limit. Currently, there is no point in provoking the dollar for growth, the economy needs a weaker dollar during the recovery period.

It is not excluded that the very discussion of curtailing the stimulating policy will not turn the dollar up, but will only slow down its decline. The dollar will only go up after the start of the real folding of QE somewhere in the beginning of 2022. By this time, the EUR/USD pair may break up the 1.3000 mark, naturally, subject to the continued recovery of the eurozone economy.

In the meantime, the supporters of the EUR/USD pair should not wait for serious and directional movements before the results of the Fed meeting with the subsequent press conference become known. This week, the dynamics of the main Forex pair will depend mainly on one factor - the FOMC meeting. The rest are secondary, and the euro is unlikely to look in their direction, not to mention the reaction. Thus, the eurozone published data on the trade balance for April, reflecting growth, but investors ignored the report.

However, the market, as we know, is an unpredictable thing, therefore, the possibility of a surprise in the movement of the euro before the Fed meeting cannot be excluded.

Since the Fed is likely to maintain rates and a soft tone for the future, the dollar short looks the most acceptable prospect. EUR/USD bulls should consider buying above 1.2130.

With regard to the level of 1.2300 and above, a breakdown can occur at any time. In fact, Friday's downward movement acted as the last collection of stops before the upward acceleration began. The bulls will be able to send the quote above 1.2300 after the Fed meeting or a little later. The dollar will face the greatest pressure in August, after the US government debt threshold expires on July 31.