The euro/dollar pair shows a corrective rise today after yesterday's decline toward the 1.0660 level. The bears on EUR/USD failed to establish themselves in the 1.06 range. Buyers have regained the initiative as they attempt to break out of the price range between 1.0650 and 1.0770. The pair has traded within this price corridor for the second consecutive week. The wide-ranging flat suits both buyers and sellers. Ahead of the June meeting of the Federal Reserve, traders are not rushing to open large positions either in favor of or against the dollar. Therefore, the pair is forced to trade within the range mentioned above, eagerly awaiting the verdict of the Federal Reserve.
First and foremost, it is necessary to emphasize that today's rise in the EUR/USD is primarily due to the weakening of the American currency. The euro, in turn, has come under pressure and cannot play its own game, even in the context of a corrective rebound. The reason is that the second estimate of the European economic growth data was published today. The indicator was revised downward. Although the revision was minimal, its consequences were significant as the eurozone entered a recession. This is the first decline after the pandemic. The economy of the 20 countries contracted by 0.1% from January to March. It is reported that this happened "due to sharp changes in energy markets and production stagnation."
Recall that in mid-May, the European Commission presented an updated economic forecast (the previous one was published in February this year), which improved the forecast for the European Union's economy for this year but worsened the inflation forecast. Thus, while GDP growth in 2023 was previously forecasted at 0.8%, according to updated data, the European economy is expected to grow by 1%. The report states that the European economy "continues to show resilience," the decrease in energy prices, a reduction in supply chain issues, and a strong labor market will lead to moderate GDP growth in the first quarter of this year, "dispelling concerns about a recession."
Eurostat's preliminary estimate shows that the eurozone did not enter a recession and demonstrated minimal growth (0.1% every quarter, 1.3% annually). It was also emphasized that the European Union will most likely avoid a recession this year "despite destabilizing risks."
However, today's release nullified the voiced optimism: according to the second estimate, GDP volume declined by 0.1% quarterly in the first quarter, and annual growth was only 1.0%.
Such a plot twist on the eve of the ECB's June meeting does not favor the single currency. Nevertheless, instead of heading towards the lower boundary of the range between 1.0650 and 1.0770, the EUR/USD pair is moving towards its upper boundary. This strange, at first glance, price dynamics is due to the weakening of the American currency. Today's US Dollar Index reached a weekly minimum, once again returning to the area of the 103 level.
In the "quiet period" (a 10-day period during which Federal Reserve members are not allowed to voice their opinions publicly), traders react sharply to macroeconomic releases, most unfavorable for the dollar bulls. For example, today, labor market data was published in the US.
The weekly indicator of initial claims for unemployment benefits has been showing an upward trend for the past two weeks, and this week also recorded an increase, up to 261,000. This is a significant rise in the indicator, considering that it increased by 233,000 last week. Against the backdrop of the unexpected increase in unemployment in May (up to 3.7%), this fact has exerted additional pressure on the greenback.
Conclusions
Overall, the situation remains uncertain. Today's price increase and yesterday's decline occur within an established range: sellers take profits as the pair approaches the middle of the 6th figure, and buyers close their long positions as the price approaches the 8th figure. Even if buyers "exceed the norm" today, long positions are still risky, as there are no substantial grounds for developing a bullish trend. Especially in anticipation of the June meeting of the Federal Reserve, which could potentially "reshape" the fundamental picture for the EUR/USD pair.
Therefore, despite the apparent attractiveness of long positions, it is advisable to maintain a wait-and-see stance on the pair. The price increase is strange and largely unjustified. Typically, such emotional spikes end with a price retracement in the opposite direction.
