The reports released on Thursday on the U.S. economy and the core PCE index showed significant contradictions. However, the market interpreted them quite unambiguously — not in favor of the dollar.
For the past several days, traders have been trading on macroeconomic signals within the range of 1.1610–1.1660, and Thursday was no exception. Despite the importance of the released data, the pair failed to break out of the specified price corridor. Buyers of EUR/USD only approached the upper boundary of the range before the upward momentum faded. The pair remained within the 16-figure range, but this does not diminish the significance of the data released: it could still remind traders of its presence, especially if U.S.-Iranian negotiations conclude with the signing of a peace agreement. In that case, market focus would shift back to "classical" fundamental factors (the dynamics of macroeconomic indicators, prospects for Federal Reserve monetary policy, etc.).
The second estimate of U.S. GDP for the first quarter was noticeably weaker than the initial one. The reading was revised downwards from 2.0% to 1.6%. Most analysts expected confirmation of the initial estimate, so the release alarmed market participants and heightened concerns about a cooling U.S. economy. Although formally, the U.S. economy accelerated its growth after a distinctly weak 0.5% in the fourth quarter of last year (when it was hit by a prolonged government shutdown), the details of the report signal possible structural problems.
Firstly, the deterioration of consumer demand is concerning. The consumer spending figure (a key driver of the U.S. economy) was revised downward. According to the revised data, growth amounted to only 1.4%, whereas the initial estimate was 1.6%. What is particularly important is that the services sector, which has long been a "bulwark of resilience" for the U.S. economy, demonstrated weak dynamics.
The dollar bulls were also disappointed by the external sector. Imports continued to grow significantly faster than exports, putting strong pressure on the "headline" GDP figure. Under "normal" conditions, high imports can reflect robust demand; however, in current realities, they primarily indicate weakness in domestic production and a deterioration in net exports.
Moreover, it is important to remember that a significant portion of the first-quarter growth was driven by the recovery of government spending after a prolonged shutdown at the end of last year, rather than by organic strengthening in the private sector. Naturally, this factor will not "work" in the coming quarters, which could negatively impact key macroeconomic indicators.
On Thursday, the U.S. core PCE index was also published — one of the Fed's most important inflation indicators. On a year-over-year basis, the figure was in line with forecasts, rising to 3.3% in April (an upward trend has been recorded for the second consecutive month). On a month-over-month basis, the index slowed to 0.2%, with a forecast of 0.3% (a downward trend has been observed for the second consecutive month). Real disposable incomes fell in April, indicating a decrease in purchasing power. The savings rate collapsed to 2.6%. This suggests that Americans are forced to tap into their savings amidst high gasoline prices and rising service costs.
Overall, the structure of the reports signals an intensification of a stagflationary scenario, in which high inflation coincides with slowing economic growth.
Thus, the reaction of EUR/USD traders is quite justified — the releases published today did not favor the greenback. However, the further price trajectory (at least in the medium term) will be determined not by macroeconomic reports but by the geopolitical agenda, especially in light of recent insider information.
According to Axios, U.S. and Iranian negotiators have indeed reached a fundamental agreement on a 60-day memorandum of understanding that is intended to extend the ceasefire and launch negotiations on Iran's nuclear program. Among the conditions are the demining and unblocking of the Strait of Hormuz, a phased easing of the blockade of Iranian ports, Tehran's renunciation of developing nuclear weapons, and discussions on easing sanctions. However, the final approval of the deal requires Donald Trump's endorsement, which is currently lacking.
If the U.S. president approves the reached agreements, market interest in risk will rise, and buyers of EUR/USD may test the resistance level at 1.1700 (the upper boundary of the Kumo cloud on the daily chart) with subsequent consolidation within the 17-figure range. But if the parties fail to finalize the deal, the pair is likely to remain within the range of 1.1610 – 1.1660 (the lower and upper lines of the Bollinger Bands indicator on the H4 chart).
