The most anticipated economic report of the week concerned personal income and expenses. It showed that US personal income declined for the second month in a row, namely by 2.0% in May, reflecting the weakening of the impact of incentive payments, which turned out to be better than expected – a decline of 2.5% was expected. This affected costs, which remained at the same level in nominal terms and fell by 0.4% in real terms. Nevertheless, the main picture is better than it seems at first glance. Spending on real services continued to grow, even despite the reduction in spending on goods. Many states have lifted or significantly relaxed the current restrictions on doing business in the period from May to June, giving service companies the opportunity to expand their activities.
As for inflation, the same report shows that price growth accelerated in May. The overall PCE inflation increase to 3.9% last month, while the core PCE, which is the Fed's preferred indicator of inflation, rose to 3.4%. The latter is at its highest level since the early 1990s.
In total, the situation does not look too optimistic – a decline in personal income and expenses amid rising inflation. Nevertheless, there is another positive indicator – the growth of housing prices. It almost reached 24% year-on-year in May, while sales of already built homes declined for the fourth month in a row. The employment report in the context of rising prices and a simultaneous decline in real incomes on Friday may lead to increased volatility.
Generally, the US dollar starts the week as the favorite. Another CFTC report was published last Friday, which included the markets' reaction to the results of the FOMC meeting on June 16. It turned out to be predictable – the demand for the US dollar sharply increased, which added reasons for its strengthening. If such strengthening is supported by a good pace of recovery of the US economy, there will be certain doubts about it.
On Thursday, US President Biden announced an agreement with the Senate regarding the infrastructure plan for $ 1.2 trillion. This news could support the demand for the US dollar, but a few hours later, he announced the need for simultaneous adoption of the Democrats' plan to support the family. The Republicans reacted negatively, which increases the likelihood of a continuation of the political confrontation and reduces the chances of the dollar's growth.
EUR/USD
The euro's net long position underwent the largest weekly contraction in the last 3 months, with the target price moving below the long-term average. The chances of a full-blown downward reversal of the EUR/USD are higher.
At the same time, the bullish preponderance for the euro is still strong, so a sideways movement looks more likely in anticipation of Nonfarm data on Friday. An update of the low of 1.1846 is unlikely. If attempts are made to reduce purchases, then returning above the level of 1.20 is justified.
GBP/USD
The Bank of England left the current monetary policy unchanged by 8 votes to one. QE was also retained in the amount of 875 billion +20 billion corporate bonds. The only dissenter was Chief Economist Haldane, who is coincidentally leaving his post in the near future. In the accompanying description, the Bank of England states that it will not tighten measures until there is clear evidence of progress towards achieving its targets. This means that inflation is expected to exceed 3% over a temporary period and it would be wrong to jeopardize the pace of recovery with early intervention.
As a result, the pound sterling did not receive any support from the Bank of England. The CFTC report showed a massive contraction in the net long position, which led to a sharp decline in the target price.
The target price leaving below the long-term average may mean that another wave of decline is expected. If the support level of 1.3785 is broken, one can sell on the breakdown with a target of 1.3665. A stronger decline has not yet been justified in any way.
