Key data on inflation growth in Germany and US economic growth were released today, and the reports turned out to be positive, surpassing the forecast estimates. This situation has complicated the puzzle for traders of the EUR/USD pair, who are still trying to interpret the statements made by Lagarde and Powell at the ECB Forum in Sintra yesterday. Based on their speeches, the head of the Federal Reserve has adopted a more hawkish stance, while the head of the European Central Bank has become somewhat more cautious in her remarks. However, Powell and Lagarde have tied the prospects of tightening monetary policy to the dynamics of inflation growth (in the US and the eurozone, respectively) and economic growth. This cautious approach from the central bank heads explains the market's restrained reaction to their statements and the volatile response among traders to today's reports.
Report on Inflation Growth in Germany
Let's start with Germany. According to the published data, inflation in the country grew more this month than anticipated. The overall consumer price index on an annual basis reached 6.3%, exceeding the projected decline to 6.2% (compared to the 6.1% value in May). Every month, consumer prices rose by 0.3% after experiencing a decrease of -0.1% in the previous month.
The annual Harmonized Index of Consumer Prices (HICP), which the European Central Bank prefers to use for measuring inflation, also deviated from the forecasts. It reached 6.8%, whereas most experts had predicted a rise to 6.7%. In May, the core inflation stood at 6.2%. All the indicators in today's report displayed an upward trend following several months of decline.
In simpler terms, the strong figures for German inflation today came as a surprise, indicating a potential increase in inflation across the eurozone. According to preliminary forecasts, the overall consumer price index in the eurozone is expected to decrease to 5.6%, while the core index is projected to rise to 5.5%. Considering the dynamics of German inflation, tomorrow's release will also be positive, providing support for the euro. It's worth mentioning that the data released today from Spain also reflected an acceleration of inflation in the country: the consumer price index rose by 0.6% every month in June, following no change in May. On an annual basis, the indicator reached 1.9%, surpassing the projected decline to 1.7%.
Despite these fundamental factors, the EUR/USD pair could not sustain its position above the 1.09 level after experiencing a sudden rise to 1.0942. The unexpected support for the US dollar from American releases was the reason behind this development.
Allies of the dollar
At the beginning of the US session, macroeconomic data was published in the United States. First, we received the final estimate of the US GDP growth for the first quarter. Most experts were confident that the final estimate would match the previous (second) estimate. However, the indicator unexpectedly revised upwards, showing a significant increase from 1.3% to 2%. Representatives from the Bureau of Economic Analysis attributed the upward revision to revised data on exports, investments in the housing sector, consumer spending, and state and local government expenditures.
In addition, there was another surprising macroeconomic indicator today, this time related to the labor market. The number of initial jobless claims unexpectedly decreased to 239,000, reaching the lowest level in the past four weeks. The forecast for this indicator was expected to be around 270,000.
However, there was a negative aspect in the real estate sector. It was revealed that the volume of pending home sales in the US declined by 2.7% monthly and by 22.2% annually in May. Both components of the release fell into the "red zone."
Nevertheless, traders focusing on EUR/USD paid attention to the positive aspects of US statistics. The upward revision in the data on US economic growth for the first quarter allowed the bears to strengthen their hawkish expectations regarding the actions of the Federal Reserve at the July meeting. According to the CME FedWatch Tool, the probability of a rate hike has increased to 90%. Following the data release, the yield on 10-year treasuries rose to 3.86% (the highest level since March 9), and the yield on 2-year bonds surged to 4.9%. As a result, the dollar strengthened its position across the market, including against the euro.
Selling the EUR/USD pair might appear more attractive than ever. However, there are two considerations. First, data on personal consumption expenditures will be released tomorrow (Friday). Second, the inflation report for the eurozone will also be published tomorrow. Judging by the German preview, European inflation may support EUR/USD buyers. At the same time, the PCE index may pressure the dollar (forecasted to be at the same level as the previous month, i.e., 4.7%).
Opening large trading positions in anticipation of these crucial releases carries inherent risks. Today's price decline is likely driven by emotions, which tend not to last long (traders reacted to the unexpected upward revision of US economic growth data). However, if tomorrow's core PCE index falls into the "red zone" and European inflation shows a positive outlook, EUR/USD buyers may regain the initiative. Therefore, it is advisable to refrain from participating in the market.
