According to the two-day results after the release of data on the growth of US inflation, it can be clearly concluded that the published figures could not set up the dollar rally. Despite the long-term inflationary records, traders remained skeptical about the prospects for the Fed's monetary policy. Nevertheless, Fed representatives do not get tired of convincing the market of the correctness of the "dovish" conclusions. For the last two days, many members of the US regulator have voiced their position, and unitedly announced that it is too early to talk about an early curtailment of QE. After some hesitation, the dollar bulls gave up: the US dollar index could not even leave the area of the 90th mark, which indicates the vulnerability of the US dollar.
In turn, the EUR/USD stopped declining and stayed around the borders of the 1.21 level. In general, the bears did not manage to take full advantage of the situation. In spite of the breakthrough nature of the inflation release, the price only declined by 100 points, moving away from two-month highs. Moreover, buyers were able to take control just the next day after the intriguing publication, cancelling the downward impulse. At the moment, traders are attempting to reach the level of 1.21 again in anticipation of the next information event.
It is worth noting that the European currency is also showing its intentions – the current price dynamics is due not only to the US dollar's vulnerability. The fact is that the economic report of the European Commission was published the day before yesterday, which supported the euro. Brussels has significantly improved the forecast for the development of the economy in the EU countries. It is expected to return to its pre-crisis state as early as next year. According to new estimates, the European Commission expects economic growth in the 27 countries of the Alliance at the level of 4.2-4.3% this year. Next year, growth is expected at 4.4%. At the same time, the previous forecast, which was published in mid-February, was more pessimistic. In Brussels, the EU economy was forecast to grow by 3.7% this year, and by 3.9% in 2022. Commenting on the published figures, EU Commissioner for the Economy, Paolo Gentiloni, said that "the shadow of the coronavirus crisis is slowly slipping from the European economy."
It can also be recalled that the optimistic sentiments surge not only in the European Commission, but also among European entrepreneurs. In particular, the German PMI business activity index in the manufacturing sector came out in the "green zone" the week before the last one, ending up at 66.4 points. The indicator has been steadily rising since the beginning of the year, and it updated the annual high in March. The following month, the indicator came out almost at the same level, reflecting the recovery processes. The German PMI also remained above the key 50-point mark in the service sector. The pan-European PMI indices showed similar dynamics. The ZEW reports repeated the trajectory of the PMI. For example, the German index of business sentiment rose to 84 points – this is the best result in the last 20 years. This result reflects the optimism of German entrepreneurs about the prospects for the recovery of the European economy in view of the vaccination of the population against coronavirus, the stability of the economy in the first quarter and a decline in the COVID-19 cases in Germany.
The euro is also supported by another fundamental nuance. So, if the Fed members voice a common position on the prospects for monetary policy (assuring traders that the current parameters will not be revised despite the growth of key indicators), then the European Central Bank has split opinions on the prospects for the ECB's monetary policy. Here, the representatives of the "hawkish" position of the Central Bank suggested that the regulator may soon decide to slow down the pace of bond purchases, contrary to the previously declared intentions to keep the PEPP program in its current form at least until March 2022. Such rhetoric was voiced, in particular, by Luis de Guindos, Martins Kazaks, and Klaas Knot. In turn, the representatives of the "dovish" position were Francois Villeroy de Galhau and Isabelle Schnabel, who were quick to refute such assumptions, saying that they are speculative.
Nevertheless, the very fact that some ECB members allow a reduction in QE, provides background support for the Euro currency, specially in a pair with the US dollar, amid the Fed's "dovish" position. This uncorrelation plays in favor of the EUR/USD bulls, in addition to all other fundamental factors.
Therefore, the prevailing fundamental background indicates the priority of long positions. And if the situation was characterized as "50/50" yesterday, then today, we can talk about longs more confidently. As soon as the pair breaks through the level of 1.2100 and consolidates above this level, we can consider long positions with targets of 1.2200 and 1.2240 – this year's price high.
