EUR/USD Spikes – Lone Fed Wolf Looks for Inflation Above 2%

The EUR/USD has risen 9.1% since the European Central Bank started its quantitative easing program in March, hitting a 3-month high of 1.1451 this morning. Over the same period, the US dollar has lost more than 10% of its value. The USD decline has accelerated over the last several weeks as the second quarter economic upturn predicted by US Federal Reserve Chairperson Janet Yellen has failed to materialize.

Concomitantly, Federal Open Market Committee members have gone silent on the date of a proposed rate hike, initially expected in June and then pushed to September. An FOMC member has finally spoken out this morning on the lingering zero US federal funds rate  and changed course dramatically, although his view is far from the consensus view.

Speaking in Stockholm this morning, Federal Reserve Bank of Chicago President Charles Evans has put more wind behind the sails of a low dollar by pushing the possibility of US quantitative easing into 2016. In a reversal of the Federal Reserve line on inflation in recent years, Evans has suggested letting inflation run past the 2% target. The inflation rate has been negative in 2015. The idea is to loosen the reign on monetary intervention and give the economy more room to grow.

High Vol

Volatility in the EUR/USD has remained high since disappointing US retail sales were reported on May 13^th. A smooth ride up today to 1.15, though, is not likely to happen. Evans is known as a lone wolf on his inflation position but in the absence of chatty Fed colleagues, his inflation views are receiving more attention.

Instead, the prospect of more dollar weakness has sent more shorts covering long positions. As US traders come online, expect more volatility at least until lunch time. Notably, the short covering is creating only minor resistance under 1.140.

Just before the US market open, the 50-day moving average is touching the upper Bollinger Band. This could signal a sharp move downwards, or a move higher on low resistance, but it is early in the day for a bold move. The price should fall below the upper Bollinger Band as the US market becomes active. More short covering on the day’s news is likely, but then a resistance level of 1.15 is on the horizon, a level not reached since January. 

The Chicago Fed chairman has hinted that inflation targets are now a psychological game. Failure to lift inflation to 2% levels will undermine the public’s confidence in the Fed, he says. Indeed, EUR/USD traders are now indicating a loss of confidence in a strong second quarter recovery.  The current growth lag aside, Evans expects the US economy to grow 2.5%-3% over the next few years.