American macroeconomic reports continue to delight dollar bulls. The resonant inflationary release that was published on Wednesday triggered increased volatility among the major group pairs. On Thursday, secondary (but at the same time, quite important) indicators were published in the USA, which also came out in the green zone. In pre-crisis times, such dynamics would have had a completely different effect: the dollar would sweep away all resistance levels on its way, dominating the entire market. But today, the situation is different: dollar bulls are forced to reckon with the opinion of the Fed, which still maintains a "dovish" position.
By and large, the impulse growth of the greenback lasted only a few hours - during the American session on Wednesday. At the Asian session on Thursday, the dollar index went into a drift, only occasionally showing "signs of life." Against the background of such phlegmatic US currency, buyers of EUR/USD tried to return to the area of the 21st figure. The euro is putting up a decent resistance to the greenback, but still, the prospects for the upward trend depend primarily on the behavior of the dollar.
After the first emotions following the results of yesterday's release subsided, a natural question arose among traders: will the Fed react to the spasmodic rise in inflation, or will it ignore the report? It should be noted here that the majority of experts warned that inflation indicators would surge upward, reflecting the recovery of the US economy. But the real result exceeded even the wildest expectations. Against the background of such trends, some analysts suggested that the regulator's members underestimated the potential for inflationary growth, therefore, contrary to their "dovish" attitudes, they will have to respond to the current situation by tightening monetary policy.
Federal Reserve officials have already refuted such assumptions, countering the fact that a single release (albeit a breakthrough one) a priori cannot indicate "uncontrolled inflation". In their opinion, the situation should be analyzed in dynamics, assessing the tendencies of several months. If the price pressure continues to grow, the regulators are ready to take "appropriate measures", but at the same time, they assure market participants that inflationary growth is temporary. In addition, representatives of the Central Bank point to the effect of a low base. Indeed, the consumer price index on a monthly basis last year was in negative territory for three spring months. In annual terms, the indicator came out in April at around 0.3%, in May - at around 0.1%. This partly explains the fact that the April increase in consumer prices this year was the strongest in the last 13 years, and the growth rate of core inflation was the strongest in the last 26 years.
In other words, the Fed did not share the optimism of dollar bulls about the prospects for monetary tightening in response to rising inflationary indicators. During the last 24 hours, several representatives of the Fed voiced their position (Christopher Waller, Patrick Harker, Richard Clarida, Raphael Bostic, Thomas Barkin) - all of them remained adherents of the "dovish" scenario. Moreover, Federal Reserve Bank of Atlanta President Raphael Bostick suggested that inflationary pressures would persist until early autumn - but then inevitably weaken. None of the speakers allowed the option of early completion of QE and/or an increase in interest rates in the foreseeable future.
Such an alignment of the "dovish" character has cooled the ardor of dollar bulls. The dollar index suspended its growth, and the EIR/USD pair could not overcome the support level of 1.2070 (the middle line of the Bollinger Bands indicator on the daily chart). Moreover, the buyers were able to seize the initiative, trying to return the pair to the area of the 21st figure. At the same time, traders today ignored rather important macroeconomic reports.
For example, today the growth rate of initial applications for unemployment benefits came out in the "green zone" - at around 473,000. This is the best result since March last year (when the US economy had not yet fallen under the rink of the coronavirus crisis). Last week, this indicator came out at the level of 507,000, on the year before last - at around 590,000. That is, the indicator has been consistently declining for the third week in a row. But this fact was ignored by the market.
Likewise, the market ignored another US release, which also reflected positive momentum. We are talking about the producer price index, which is an early signal of a change in inflationary trends (or their confirmation). On a monthly basis, this figure came out at around 0.6% (with the forecast of a decline to 0.3%). In annual terms, the indicator came out at the level of 6.2% (with the forecast of growth up to 5.9%). Despite the "green color" of this release, traders of the dollar pair ignored it.
All this suggests that the sale of the EUR/USD pair is risky: the initial downward impulse has faded, and now, for the development of the downward movement, the bears need an additional information feed (while the rhetoric of the Fed representatives exerts background pressure on the greenback). On the other hand, traders have clearly cut bearish rates, adjusting their stance on the expectation of sustained inflationary pressures. This fact does not allow buyers of the pair to gain a foothold above 1.2100.
In conditions of such uncertainty, it is more expedient to take a wait and see attitude, watching the confrontation between bulls and bears. If the sellers push through the support level of 1.2060 (the middle line of the Bollinger Bands on D1), then the corrective pullback may continue to the level to the base of the 20th figure (the Kijun-sen line on the same timeframe). The 21st figure is a litmus test for buyers of the EUR/USD pair: if they can gain a foothold above the 1.2100 target, then longs will again be in priority, with medium-term targets at 1.2200 and 1.2240 (the current year's maximum price).
