The bearish banquet for the EUR/USD pair turned out to be rather short-lived: the dollar strengthened its positions for several days (since the announcement of the results of the June Federal Reserve meeting), but this week the sellers of the pair lost control over the situation.
The strengthening of the dollar was rather emotional in nature, when, against the background of dove-like expectations, the Fed unexpectedly announced its hawkish intentions. True, these intentions are aimed at 2023, but, as you know, were just in the middle of 2021. Such distant prospects cannot keep traders "in good shape" for a long time, so the dollar bulls needed support from the head of the Fed. If yesterday Fed Chairman Jerome Powell had announced the curtailment of QE "at one of the subsequent meetings of the Fed", the greenback would have continued its attack - even against the euro. But Powell "did not justify the hopes placed on him": he voiced a rather soft position, saying that the support of the Fed is still necessary for the US economy, and the rise in inflation "will not force" the members of the central bank to raise the interest rate - the situation will be assessed in an integrated manner, taking into account the dynamics of the main indicators of the labor market.
Such cautious and even dovish remarks (compared to the blatant hawkish statements of a number of Fed representatives – such as Bullard, Kaplan, Mester) disappointed dollar bulls. The greenback weakened throughout the market, and the EUR/USD bears, apparently, massively closed short positions, provoking another upward pullback of the pair. And although the bulls are still trading within the range of 1.1850-1.1950, the pair is drifting at the upper limit of this price range. Powell's disappointing rhetoric "sobered" market participants. Unexpectedly, it turned out that the prospects for a rate hike are too remote (while key indicators should show positive dynamics), and the fate of QE is still vague: apparently, this issue will be discussed only in September. Against the background of such uncertain prospects, the fighting spirit of the dollar bulls came to naught, and the greenback began to gradually lose its positions.
The European currency, in turn, received support from macroeconomic statistics today. Today, the June PMI indices were published in key European countries, which for the most part were in the "green zone".
German, Italian, partly French, 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 French index of business activity in the manufacturing sector turned out to be disappointing – it fell short of the forecast level, showing a slight decline. Nevertheless, the indicator remained well above the 50-point value (58 points), which indicates an improvement in the situation in this area of the economy. At the same time, the PMI index in the French services sector showed a positive trend, rising to 57.4 points.
It should be recalled here that the June IFO indices will be published in tomorrow's European session. Last month, the German indicator of economic expectations exceeded the 100-point mark for the first time since February 2018. The indicator of business environment conditions similarly pleased EUR/USD bulls, being at the level of 92 points (the best result since April 2019). This month, the indicators may again support the euro – according to preliminary forecasts, both components of the release will come out above the hundredth mark.
In general, the prospects for the recovery of the EUR/USD pair will largely depend on the comments of the representatives of the Fed and the ECB. In particular, the head of the Federal Reserve Bank of Atlanta, Rafael Bostic, and the head of the Federal Reserve Bank of New York, John Williams, will speak tomorrow. They are not hawks, so their rhetoric may put more pressure on the dollar. In particular, John Williams said in early June that the Fed will evaluate the "full set of data" (and not just inflation), taking into account the uncertainty about the economy. He also said that the sharp increase in inflation is temporary: this year it will be about 3.5%, but next year it will significantly decrease. Regarding the prospects for the stimulus program, Williams said that the pace of asset purchases "will depend on the incoming data." Given this background, we can assume that tomorrow the head of the New York Federal Reserve will announce similar theses. As for Raphael Bostic, he recently in an interview was concerned about the dynamics of the recovery of the American labor market. According to him, "We are still 8 million jobs short of where we were pre-pandemic," and in his opinion, "this is the most important indicator that the central bank should monitor." At the same time, he also warned the Fed against premature actions and excessive optimism.
Thus, bulls of the EUR/USD pair have every chance to leave the range of 1.1850-1.1950 and return at least to the area of the 20th figure. But long positions can be opened if the bulls still settle above the upper limit of the price band (the targets for the upward movement are the 1.2030 (the Tenkan-sen D1 line) and 1.2060 marks (the Kijun-sen line on the same timeframe). If the upward momentum fades in the area of 1.1950-1.1960, the bears will seize the initiative again, pulling the pair to the lower line of the Bollinger Bands indicator on the daily chart – that is, to the level of 1.1880. However, judging by the behavior of the US dollar index, the second option looks unlikely – at least in the medium term.
