FX.co ★ Biden's measures to support the US population contributes to rising inflation

The world stock markets overwhelmingly ended the previous week in the negative zone on the wave of several important factors that indicate the probability of continuing a downward correction in the near future.

In our opinion, the world stock indices, including primarily the American one, are experiencing noticeable pressure for three main reasons. First, the increase in the risk of an earlier than expected change in the monetary rate of the US Central Bank in view of the increased inflationary pressure. Second, a new surge in the impact of coronavirus infection on economically developed countries, which raises fears of its increased impact on the global economic recovery. And lastly, we have the significant overheating of the stock market and, in this situation, the prices of commodity and raw materials assets, primarily oil, are pushed up.

If everything is clear with the first two reasons, the last one, which is purely technical, but at the same time, acts as direct consequences of the first two, is not so clear.

It was highlighted earlier that the reason for the sharp growth in inflationary pressure in the US, which is not observed in Europe, is unprecedented measures of financial support for the country's population from the government. The decision of J. Biden and his administration to implement a program to support Americans in the context of the COVID-19 pandemic has done its job. However, receiving the so-called "helicopter money", which is not secured by anything and is actually an issue, has accelerated inflation to the level of 2008. We believe that the government secretly wanted to pump up inflation to stimulate business, but they overdid it a little since its values reached unacceptable levels.

That is why it was pointed out in the last article the need to end unsecured financing of the population. "Helicopter money" is the main reason for the rise in inflation and only stopping the issuance of this money to the population will truly solve the problem of high inflation.

But how can this be solved? After all, it will be extremely difficult to stop this funding at the moment. The US population, which worked in low-paid jobs before the pandemic, has already got used to sitting on benefits over the past six months, and although it is lower than their previous salary, it allows them to exist. In fact, it is the reluctance of these sectors of the population to go to work that leads to the low level of employment. This situation creates a vicious circle that will need to be broken, otherwise, America will face great social major change.

There is no doubt that investors understand this situation, and so, there is a noticeable decline in the propensity to take risks, which leads to a decline in stock indices and to the strengthening of the US dollar.

We believe that a further correction of stock indices and a deccline in demand for commodity assets will continue to support the rate of the US dollar and restrain an increase in the yield on US Treasury government bonds.

Forecast of the day:

The USD/CAD pair is trading above the level of 1.2650. The decline in crude oil prices, the fall in demand for risky assets, and the strengthening of the position of the US dollar will lead to the pair's further growth to the level of 1.2745 and to 1.2865.

The EUR/USD pair is trading at a strong support level of 1.1770. Its breakdown amid the strengthening dollar positions and falling demand for risky assets will lead to the pair's decline to the level of 1.1685.