The European Central Bank did not become an ally of the euro: the EUR/USD pair collapsed by 70 points at the end of the European Central Bank's April meeting, offsetting the successes of the previous days. Initially, the price updated the two-day high, reaching 1.2070. But the pair updated the daily price low at the beginning of the US session, ending up at the bottom of the 20th figure. It is noteworthy that the meeting itself was rather passing: the ECB left all the parameters of monetary policy in the same form and did not change the key wording of the accompanying statement. Therefore, the euro actually ignored the publication of the final communique. The Governing Council was expected to leave the key refinancing rate at the same – zero-level, the deposit rate - at -0.5%, the ECB loan rate - at 0.25%. In addition, the central bank will continue to purchase assets under the emergency assistance program (PEPP). By and large, the accompanying statement was almost exactly the same as the March statement, except for minor details. The reaction of traders was appropriate: the pair was unwaveringly trading in the middle of the 20th figure.
But an hour after the announcement of the results, ECB President Christine Lagarde's press conference began. Her rhetoric still stirred up traders. First, she denied rumors that the central bank may cut PEPP this summer. According to her, the European Central Bank did not discuss the curtailment (or adjustment) of a large-scale program of emergency asset purchases. At the same time, she recalled that in March, the central bank accelerated the pace of buying bonds, so at the moment it is "too early" to talk about any changes.
Moreover, according to Lagarde, the timing of the reduction of PEPP – even approximate - is not defined at all: everything will depend on the incoming data. Commenting on the latest macroeconomic releases, the head of the ECB noted that despite a slight recovery in inflation, the underlying price pressure remains restrained, and the acceleration of some inflationary components in recent months is due to temporary factors (mainly due to rising energy prices). It is worth recalling here that the latest data on the growth of European inflation reflected the weak growth rates of the main indicators. Thus, the core consumer price index slowed to 0.9% (the downward trend is recorded for the second month in a row), and the main index came out at 1.3% with a forecast of growth to 1.4%.
In addition, Lagarde complained about the slowdown in economic activity in the first quarter and the high degree of uncertainty in the medium term. This is due to "coronavirus factors", including an increase in the number of cases, the prolongation of lockdowns and the slow pace of vaccination of the population. All these circumstances, in her opinion, explain the economic weakness and low consumer demand.
In other words, the ECB, on the one hand, maintained the status quo, but on the other hand, it voiced a dovish rhetoric. The key message of today's meeting is that the ECB does not intend to prematurely curtail the program of emergency asset purchases. This fact put pressure on the single currency, as in the run-up to the April meeting, hawkish rumors were exaggerated in the market.
Ironically, the European currency fell into the trap of traders' inflated expectations, in fact, repeating the path of the dollar, which also weakened its position due to the dovish comments of the Federal Reserve members. The only difference is that in the greenback's case, traders' hawkish expectations were more reasonable: almost all macroeconomic indicators in the US come out in the green zone, much better than the forecast values (in particular, Nonfarm and retail sales). While the European indicators leave much to be desired: both in the sphere of inflation and in the sphere of the labor market (the unemployment rate in the euro area remained at 8.3% and is projected to rise to 9% by the end of the third quarter).
All this suggests that the EUR/USD pair will continue to follow the greenback, without having its own arguments for growth. The ECB has not become an ally of the single currency, and therefore the prospects for EUR/USD depend on the dollar's behavior. For example, today, the US dollar index reacted positively to fairly strong data on the labor market. The weekly growth rate of initial applications for unemployment benefits came out at the level of 576,000. This is the best result since March 2020 (when the US economy has not yet been hit by the coronavirus crisis). Last week, this indicator came out at the level of 586,000, that is, almost at the same level. Such figures indicate healthy trends in the US labor market.
Summing up, it should be noted that despite the almost 100-point volatility, the pair did not leave the area of the 20th figure. The downward momentum exhausted itself as soon as it began. The same can be said about the upward movements of EUR/USD: the bulls could not overcome the resistance level of 1.2070 (the upper line of the Bollinger Bands indicator on D1 and H4, coinciding on D1 with the upper border of the Kumo cloud). In other words, it is impractical to open shorts or longs counting on a short period of time. If we talk about the medium-term prospects, then the pair is completely at the mercy of the dollar. EUR/USD bears need to go below the 1.2000 mark – this is the key condition for opening short positions. If, at the end of today, sellers are unable to return to the area of the 19th figure (and, accordingly, the southern momentum fades), we can consider longs with a target of 1.2070.
