The US dollar index continues to plunge. It updated a two-year low (89.57) during the Asian session on Wednesday. The last time the index was at such low values was in January 2018. This dynamic was reflected in the major dollar pairs. As an example, the EUR/USD pair has updated a multi-month high, approaching the borders of the level of 1.23. To some extent, the US dollar is under pressure in the other major currency pairs.
The US currency was under additional pressure after yesterday's macroeconomic releases and comments from the Fed representatives. There is no trace of the former confidence of dollar bulls: all the fundamental signals indicate that the Federal Reserve will maintain the current parameters of monetary policy in the near future, even despite the abrupt growth of inflation indicators. And if last week traders were full of hope, pointing to the hawkish hints of the latest Fed minutes, the now, the last hopes of dollar bulls have finally collapsed. Almost all representatives of the US regulator spoke after the data on the growth of American inflation was published, and unitedly assured traders that the Central Bank will not adjust its policy, reacting only to a single release.
In particular, Fed's Vice President Richard Clarida stated this dovish rhetoric again yesterday. He said that the time will come to discuss the curtailment of QE, but now it is too early to talk about it. At the same time, Clarida emphasized that when assessing the prospects for monetary policy, it is necessary to consider not only the dynamics of the consumer price index, but also the growth of wages and productivity, along with employment and the share of the active population. Thus, he reminded investors that the latest Nonfarm release was noticeably disappointing – all components of the release came out in the "red zone". Also yesterday, Randal Quarles, a member of the Federal Reserve's Board of Governors, worsened the situation, as he had not yet commented on the latest inflation release. He supported his colleagues, saying that inflationary pressure is likely to be temporary, so there is no reason to revise the parameters of monetary policy.
The macroeconomic reports that were published yesterday also put pressure on the US dollar. For example, the indicator of consumer confidence of Americans unexpectedly came out in the "red zone", although experts predicted a slowdown in the indicator. But the real figures were lower than the forecast values: the indicator came out at 117.2 points with a forecasted growth of 119 points. At the same time, the April result was revised downwards. Other releases were disappointing. In particular, the Fed-Richmond manufacturing index also did not meet the forecast values, and the volume of home sales in the US primary market fell by almost 6% in April.
On the contrary, the Euro currency received support from the IFO reports yesterday. The German indicator of economic expectations exceeded the 100-point mark for the first time since February 2018, amid the continuing improvement in the epidemiological situation and mass vaccination of the population. The business environment indicator also entered the green zone, reaching 92 points (best result since April 2019). It can be recalled that the latest ZEW reports also came out positive. In particular, the German business sentiment index surged to 84 points, which is the best result in the last 20 years.
Before that, the euro was also supported by the PMI indices. French, Italian, as well as pan-European indicators, came out in the "green zone", reflecting the recovery processes in both the production sector and the service sector. Only the German index of business activity in the manufacturing sector was disappointing – it fell short of the forecast level, showing a slight decline. Nevertheless, the indicator remained well above the 50-point value (64 points), which indicates an improvement in the situation in this area of the economy. At the same time, the PMI index in the German services sector exceeded the forecast level. It came out at 53 points, against the expected growth of 51 points. These results reflect the optimism of European entrepreneurs about the prospects for the recovery of the regional economy.
The fact that some ECB members allow early winding down of QE also added support to the Euro. And although the ECB President, Christine Lagarde, opposed hasty decisions in this direction, a certain uncorrelation with the Fed regarding the prospects for tightening monetary policy parameters allows the EUR/USD bulls to reach new highs.
From the technical point of view, the EUR/USD pair is located between the middle and upper lines of the Bollinger Bands indicator – both on the daily, weekly, and monthly chart. On W1 and MN, the Ichimoku indicator still shows a bullish signal "Parade of Line", which indicates the priority of longs. Long positions can be viewed with the main target of 1.2305 – upper line of the Bollinger Bands on the weekly chart. It is too early to talk about higher values, since buyers of EUR/USD must break through the level of 1.2300, and consolidate within it.
