The euro returned to its local highs, while the pound sterling never managed to break higher. The pressure on traders comes from tomorrow's US inflation data, as the reaction and final values may surprise the markets, as it did with the US unemployment rate report last week. The UK GDP reports, together with the budget deficit data, make us look with apprehension at further purchases of the pound sterling.
Inflation can no longer be stopped
Many investors fear the surge in inflation could prompt the Federal Reserve to tighten its policy earlier than expected. The Labor Department is to publish its latest CPI data tomorrow and is expected to rise 3.6% per annum in April. Inflation expectations in the US soared to their highest level in a decade as the economy recovers from the pandemic and also due to the Fed's soft policy. The speeches of the Fed representatives, which will be held today and tomorrow, also keep traders in suspense. The main question is whether the expected spike in price pressures will be long enough to force the Federal Reserve to tighten policy sooner than current forecasts suggest. At the moment, the indicator of inflationary expectations in the United States has reached the highest level since 2006.
From a technical point of view, for the EUR/USD pair, such a powerful breakout and return to the resistance at 1.2177 indicates buyers' desire to push the euro further upwards, but this requires a breakout of the larger level 1.2177. Only a breakdown of this range will open a direct road to new local highs in the area of 1.2235 and 1.2294. The pressure on the euro will return only after the bears manage to push the trading instrument below the level of 1.2150, but so far everyone is looking at buying and traders are not particularly concerned. The breakout of 1.2150 will definitely hit the stop orders of speculative players, which will lead to renewed lows in the area of the base of the 21st figure, and maybe even lower - in the area of 1.2060.
As for today's fundamental statistics, which led to such a rapid rise in the euro, it happened after the release of the report, indicating a sharp rise in confidence in the German economy, which reached its highest level in more than two decades. The slowdown in the spread of the third wave of COVID-19 has made economists more optimistic. A report from the Leibniz Centre for European Economic Research indicated that the ZEW economic sentiment indicator rose sharply to 84.4 points in May from 70.7 points in April. The last time this figure reached a higher level was in February 2000. It was predicted that the indicator will jump to only 72.0 points. The index of current conditions in May rose to -40.1 points, which is also better than the forecast of economists at -41.3 points. ZEW continues to expect a significant economic recovery in the next six months.
As for the eurozone, the indicator jumped very strongly. The corresponding index rose to 84.0 points, while the indicator of the current economic situation rose to -51.4 points. This suggests that the prospects for the economic development of the eurozone have improved significantly, which will have a positive impact on the economy. Inflation expectations in the euro area also rose in May to a new value of 77.6 points.
As I noted in my forecast this morning, the countries of the eastern wing of the eurozone may become the main driver of growth in this direction. According to the data, inflation in Hungary and the Czech Republic in April this year accelerated more than expected. These are two countries with a population of about 10 million that have been hit hard by the COVID-19 crisis in terms of deaths per capita. However, they managed to maintain one of the lowest unemployment rates in Europe and now that the time for stimulus payments and support has come, consumer demand is sure to lead to even more active price pressure. The Czech National Bank last week raised its forecasts for price increases and said that reducing the risks of a longer economic downturn caused by the pandemic would allow them to raise rates, possibly as early as this summer. In Hungary, inflation is at its highest level since 2012.
Italian industrial production data did not put much pressure on the euro, although it turned out to be much worse than economists' forecasts. According to a report from the Italian statistics office, Istat, industrial production declined 0.1% month-on-month in March 2021, after rising 0.1% in February. Economists had expected growth of 0.4%. On an annualized basis, industrial production increased by 37.7% in March.
GBP
As for the British pound, it is quietly waiting at its monthly highs for tomorrow's data on the UK economy. Prime Minister Boris Johnson, on Tuesday, laid out his plan for a UK resurgence after the coronavirus crisis, promising new laws to unleash "the full potential of the nation," and said the country should not go back to what it used to be.
In Queen Elizabeth II's traditional speech in parliament, the government laid out a legislative agenda with measures to expand broadband internet and 5G mobile communications, expand home ownership and reform healthcare. The overall theme was the recovery from the pandemic that hit the UK with its biggest crisis since World War II. Johnson also noted that the government is ready to take full advantage of the UK's new freedom from European Union rules to establish its own government subsidy regime for businesses, reform government procurement and create at least eight free ports.
All this is good, but at whose expense the banquet will be held has not been disclosed. Let me remind you that the data on UK GDP for the first quarter will be released tomorrow, and according to which, the economy will contract by 1.6%. However, the pound is unlikely to react to this report with a fall, as the second quarter will clearly level all the lag and demonstrate impressive growth rates. A number of March reports on the state of industrial production, the balance of foreign trade, and activity in the service sector will be much more interesting.
In my morning forecast, I touched upon the hidden problem of the UK economy, which is quite a constraining factor for the growth of the sterling. In short, the hot spot is the current account deficit, the difference between money entering the UK and money leaving it. The gap is projected to be the largest since World War II, as Britain faces a number of post-Brexit challenges and at the same time struggles to recover from the pandemic, with an emphasis on exports.
As for the current technical picture of the GBP/USD pair, having protected the large support at the bottom of the 41st figure, the trading instrument has every chance of continued growth. For this, the bulls need to break above the level of 1.4155, which will open a direct path to the area of 1.4200 and 1.4240. If the bears achieve the return of control over the support at 1.4100, then the correction of the pound will lead to the equally important levels of 1.4060 and 1.4015, from where it will be possible to observe the return of large players to the market.
