FX.co ★ Stopping the "helicopter money" to the population will eliminate the high US inflation

This week's events demonstrate that investors are not entirely sure that the Fed will be able to resist the pressure of economic problems burdened by the COVID-19 pandemic.

Fed Chairman J. Powell's speech in Congress, as well as the publication of US inflation data, were the main events that influenced the markets and will continue to influence the release of these macro indicators by the end of the summer.

So why are the markets not too confident in the Fed and Powell personally?

Despite regular assurances from Fed representatives and Powell that inflationary pressures in the country will be temporary, investors still do not really believe in this. They look at the economic statistics that are coming out, which are not impressive and resemble interlace as some figures on the country's economy show positive dynamics, while others show negative ones. The situation with employment and inflation is fully related to this negative situation. Earlier, it was previously repeated that the pumping of "helicopter money" to the American population provoked by COVID-19 has led to the fact that the low-paid segments of the population are not in a rush to go to work and prefer to live on benefits; hence, the lack of a noticeable recovery of the labor market and full-fledged growth of the economy as a whole. Unfortunately, the money received into the accounts of Americans is being spent vigorously, which was the reason for the rise in inflation to the levels over the past 13 years.

In our opinion, the situation can only change by stopping stimulating demand among the population, and this means stopping the issuance of benefits gradually, as well as pumping up business with financial resources. This is the reason why investors doubt that the Fed will stick to its rhetoric about the inviolability of the current course of monetary policy. In this case, we expect a gradual curtailment of support measures, albeit not so actively and clearly at the first stage.

Inflation will not disappear until the cause is eliminated, and as already mentioned above, this is the supply of unsecured money to the population.

We believe that if the Fed fails to fully channel out the American inflation, which it is frantically trying to do, the situation will not improve without a change in the monetary exchange rate. Therefore, we expect the continuation of the downward correction in stock markets, and an increase in demand for protective assets such as gold, dollar, yen, and franc. In view of this, commodity prices will most likely remain under pressure, while crude oil prices may also be adjusted down.

These are events in the near future. But for now, the US dollar is still expected to consolidate amid the same Treasury dynamics against major currencies, the restless behavior of stock indices, and a smooth, but at the same time, steady growth in gold's price.

Forecast of the day:

The USD/CAD pair is trading above the level of 1.2550. Another price decline in crude oil will push the pair further towards the level of 1.2650.

The XAU/USD pair continues to rise towards the previously set targets. We believe that a consolidation above the level of 1820.00 will lead to further growth to 1837.00, and then to 1852.00.