Today's published report on inflation growth in the eurozone was in the "red zone": all release components fell short of forecasted values. Inflation is slowing down at a rapid pace. Although the EUR/USD pair reacted anomalously (reaching a two-day high of 1.0742), today's release clearly does not favor the euro. Discussions about the prospects of tightening the ECB's monetary policy will resurface with renewed force. And once again, these discussions will not favor the single currency, as representatives of the European Central Bank's "dovish camp" will now have additional arguments.
According to the published data, the overall consumer price index decreased to 6.1% in May, below the expected decline of 6.3%. This is the slowest growth rate since March 2022. For comparison, in the previous month (April), the overall index stood at 7.0%. The core CPI, excluding energy and food prices, decreased to 5.3% (compared to an expected increase of 5.6%). This component of the report has been declining for the second consecutive month.
The strange reaction of the EUR/USD pair can be explained by the fact that the release of European inflation coincided with the publication of the minutes from the ECB's May meeting, which turned out to be hawkish. Additionally, the European Central Bank President, Christine Lagarde, made hawkish statements during the same period, allowing buyers of EUR/USD to initiate a correction.
Arguments in favor of the euro:
The minutes from the ECB's May meeting indicate that several members of the Governing Council expressed support for a 50 basis point rate hike. It also presents the views of "some central bank members" that more decisive actions are needed to restrict rates to bring inflation back to the target level.
At an economic conference in Germany today, ECB President Christine Lagarde supported further steps toward tightening monetary policy. According to her, inflation is too high and will likely remain so for a long time.
Against such hawkish signals, the EUR/USD pair returned to the 1.70 area. Increased risk appetite also played a role following recent events in Washington.
The fate of the national debt and the ADP report:
Yesterday, the lower chamber of the US Congress passed a controversial bill to raise the debt ceiling. The Republican Party controls the House of Representatives. Still, they needed the support of Democrats to approve the bill, as many Republicans were unhappy with Speaker Kevin McCarthy's agreement with Biden and voted "against." Nevertheless, the bill passed through the lower chamber: 314 members of Congress voted in favor, while 117 voted against (71 Republicans and 46 Democrats). Interestingly, there were more Democrats in favor than Republicans among those who voted (165 and 149, respectively).
Now the Senate, known to be controlled by the Democrats, has to deal with it. Although some representatives of the Democratic Party criticized the deal, most political experts do not doubt that the bill will be approved in the upper chamber of Congress. First, the proportion of opponents of the agreement among the Democrats is much smaller than the number of "dissenting" Republicans. Second, many Republican senators support the decision reached, so no serious problems are expected in its passage through the Senate. And certainly, there is no need to worry about the final stage of the saga - without any doubt, Biden will sign the agreement coordinated with the Republicans.
Thus, on the one hand, the fundamental background that has developed today has contributed to the development of a northward correction for the EUR/USD pair. Risk-off sentiments have weakened, and the European Central Bank has voiced hawkish messages (ECB minutes + Lagarde's speech).
Nevertheless, it is advisable to take your time with long positions. First, the published data on inflation growth in the eurozone will still manifest itself. This is a kind of "delayed-action release." Second, the Non-Farm Payrolls will be released tomorrow, which may strengthen the position of the American currency.
Today, a very encouraging signal was heard for dollar bulls from the ADP agency. The report from this agency serves as a kind of "harbinger" ahead of the Non-Farm Payrolls. If the official figures on Friday follow the trajectory of this release, the dollar will receive certain support. According to the ADP report, private-sector employment in the United States increased by 278,000 in May. This figure significantly exceeded market expectations (the forecast was around 170,000). The consensus forecast regarding the official data suggests that the US labor market will demonstrate weak dynamics. According to experts, in May, 170,000 jobs were created in the non-farm sector (in April, this figure reached 253,000, exceeding forecast estimates). The unemployment rate is expected to rise slightly to 3.6% (according to other estimates, up to 3.7%).
Conclusions
Summing up the above, traders of the EUR/USD pair still cannot determine the direction of price movement. The fundamental background is quite contradictory: on the one hand, risk-off sentiments have weakened, and the ECB demonstrates a hawkish stance. On the other hand, inflation in the eurozone slowed down more than expected in May, and the ADP report came out in the green zone, "predicting" decent Non-Farm Payrolls.
In the face of such uncertainty, it is necessary to approach long positions with great caution, especially if the price approaches the 1.0750 mark (at this price level, the lower border of the Kumo cloud on the four-hour chart coincides with the upper line of the Bollinger Bands). Since May 25, buyers of the pair have been testing this target almost daily, but they have yet to be able to overcome and consolidate above it. In this case, the northward spike will end similarly.
