Yesterday, the US dollar index fell to the bottom of the 90th mark, reflecting general skepticism towards the dollar. The failed Nonfarm data published last Friday continues to put pressure on the US currency. And although the EUR/USD bears managed to organize a corrective pullback on Monday, the main currency pair remained within the level of 1.21. Moreover, the downward impulse disappeared during today's Asian session, after which buyers took control again.
In order for the upward trend to resume, the EUR/USD bulls need to break through the resistance level of 1.2170 – upper line of the Bollinger Bands indicator on the daily time frame. Traders tested this target twice (on Friday and Monday), but they returned each time. As soon as buyers approached the borders of the 1.22 mark, market participants took profits and opened short positions, thereby exerting pressure on the pair. The attack to the impassable price level can last quite a long time. But given the general weakness and vulnerability of the US currency, buyers of EUR/USD only need a strong informational reason to still consolidate above the level of 1.2170 and test the level of 1.22.
Such an informational reason might be tomorrow's release. On Wednesday, the data on the growth of American inflation will be published, which may determine the further dynamics of dollar pairs, including the EUR/USD.
It should be noted that amid the implementation of stimulating programs, experts expect strong US inflationary growth this year, while the April data should signal an increase in price pressure. A lot has been said about the risks of "uncontrolled inflation" – numerous experts, representatives of the Federal Reserve and the White House have expressed their opinion. Some economists warn that Fed members underestimate the above risks, so they will eventually be forced to resort to an early tightening of monetary policy. According to supporters of this version, unprecedented measures of fiscal stimulus (first of all, we are talking about the $1.9-trillion "American Rescue Plan") will lead to overheating of the economy. Such prospects suggest the feasibility of curtailing the Fed's dovish rhetoric.
However, most Fed officials have a contradicting opinion. The Fed Chairman regularly voices a solidarized position, whose essence comes down to the fact that the current growth of key indicators is temporary, so the Fed is obliged to maintain its presence for a long time.
The April Nonfarm data confirmed the validity of this position. The increase in the US labor market unexpectedly slowed down, reminding traders that the US economy is only at the beginning of its recovery. And if tomorrow's inflationary release also hits the "red zone", the US dollar will be under significant pressure again. In this case, hawkish conversations will finally fade. After all, what kind of "uncontrolled inflation" will be discussed if the CPI does not meet forecast level?
According to preliminary forecasts, the overall consumer price index in April should slow to 0.2% in monthly terms. It should be noted that this indicator showed positive dynamics for three consecutive months, reaching the level of 0.6%. The April pullback to the December level may be negatively perceived by the market, especially if the component goes into a negative area. But in annual terms, the overall CPI should surge, rising to 3.6% (from the current value of 2.6%). Some experts believe that the expectations here are overstated, so this indicator may come out in the "red zone". The core consumer price index (excluding food and energy prices) should show similar dynamics: a slowdown in growth in monthly terms (to 0.2%, from the previous value of 0.3%) and a significant increase to 2.3% (from the previous value of 1.6%) on annual terms.
If the inflation release comes out in the red zone, the USD will be under significant pressure – in fact, dollar bulls will "fail" the second test, after the failed April Nonfarm. And even if tomorrow's figures exceed the forecast values, the positive effect may be temporary.
It's all about the Fed's dovish stance. Jerome Powell has repeatedly said that the regulator will allow the economy to "overheat" and will not resort to retaliatory measures. A little later, his colleague, Christopher Waller, added that the Fed members will accept only the excess of the 2% inflation level, but at the same time, will not allow the inflation to accelerate the 3% level. The CEO of the Federal Reserve Bank of Boston, Eric Rosengren, said last week that it is too early to talk about curtailing QE and (even more so) raising interest rates. In his opinion, the inflationary growth will be temporary. At the same time, he was skeptical that inflation could become a problem for the US economy. Other Fed representatives voiced similar rhetoric.
Thus, the current fundamental picture indicates the priority of longs for the EUR/USD pair. From the current positions, one can consider short-term purchases with a target of 1.2170 (upper line of the Bollinger Bands indicator on the daily chart). If we talk about the medium-term prospects, then longs to the levels of 1.2200 and 1.2242 (high of the current year) can be considered.
