Forex Analysis & Reviews: 16.07.2021 - Investors abandon weakening...

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InstaForex Loprais Team - Official participant of the Dakar rally

16.07.2021 07:32 AM

Investors abandon weakening USD

According to data from July 13, the inflation rate in the United States reached 5.4%, a reading last seen in the 2008 crisis. However, the Fed stubbornly insists that such a high indicator will not last long. The time will come and they will no longer need to print money in such big volumes. Besides, interest rates will be raised sooner or later. According to most analysts, the first hike of the key rate may take place in December next year. However, it is quite difficult to make long-term forecasts as everything may change, especially since tightening monetary policy is not such an easy task. The same situation occurred in 2008 when the world economy was in the stage of recession, although not as significant as today. Back then, the Fed raised the interest rates only six years later. This is why economies believe that the tightening of the monetary policy will take place in 2023, that is, only three years after the start of easing it.

Although the US economy is recovering the losses incurred during the quarantine restrictions and the market is obviously reviving, the economy is still too weak. It is reflected in both the US currency and on the yield of government bonds. It would be extremely naive to hope that big changes could occur in the coming months. Imported goods in the United States rose by 11.3%, which is why prices for consumer goods are also likely to grow. Interestingly, there are rumors that the real inflation rate in the country is several times higher than the official figures.

The US currency declines not only due to a shaky economy but also because of an excess of money in the financial system. The money-printing press simply devalues it. Traders are not ready to invest in bonds that are not able to cover even half of inflation. Bearish sentiment is also swept across the bond market. As with the US dollar, the government bonds are now unpopular due to the fact that they continue to be issued in an unlimited amount.

In the light of such events, demand for riskier assets is buoyant as traders simply do not have other options for investing. In search of profitable investments, many have now turned to the stock market, so we can expect new peaks from the main indices. According to the most modest estimates, stocks may jump by 12-15% in the coming months. Apparently, the biggest gainers are still the technological and biotechnological sectors, as well as the real estate sector. Venture capital investments have also reached unprecedented amount. Experts are quite curious to see how central banks will stop this wave without collapsing the markets at the same time.

Against the background of rising prices, gold, which has always been an asset that protects traders from inflation, is rapidly recovering. As for oil, it is also steadily rising in value. As the US economy is getting back to normal, demand for commodities increases as well. Yet, the US dollar is gradually sliding down.

For obvious reasons, investors want to get rid of the currency that is losing its price and buy up assets that may help to cover inflationary costs. Government bonds are a different kettle of fish, so in most cases they are simply ignored. That is why the greenback is extremely volatile and government bond yields are declining. However, stocks, commodities, even Chinese stocks are steadily rising. Investors are focusing their attention on inflation risks. So, they tend to invest their funds as soon as possible in order to protect themselves from significant losses.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.