- EUR/USD has been extending its gains amid dovish Fed policy and the eurozone's vaccination drive.
- Eurozone PMIs and Fed meeting minutes are set to move the currency pair.
- Mid-May's daily chart is pointing to further gains.
- The FX Poll is showing mild downside pressure.
Time to change course? Speculation that the Fed would be forced to move whipsawed the dollar. In the meantime, Europe catching with the US on the vaccination front is supporting the euro. What is next? The Fed's minutes and forward-looking data from Europe are set to rock EUR/USD with its newfound volatility.
This week in EUR/USD: Extended NFP fallout
To taper or not to taper? That remains the question for the Federal Reserve and for markets, which have had mood swings. The echoes of the previous week's disappointing Nonfarm Payrolls figures convinced investors that the Fed would keep printing $120 billion per month for longer, weighing on the greenback.
On the other hand, comments from Robert Kaplan, the Dallas Fed President, about the need to cut back on support boosted the greenback.
And then came inflation – the headline Consumer Price Index surged to 4.2% YoY, and Core CPI soared to 3% yearly, both above expectations. It seemed to have caught the central bank off guard. Nevertheless, the dollar struggled to fully capitalize on the news as the bump-up in inflation is probably linked to the rapid reopening, a factor that could dissipate later on.
US retail sales missed estimates by remaining flat in April, but that came on top of an upward revision. The University of Michigan's Consumer Sentiment Index unexpectedly dropped.
On the other side of the pond, the debate about the European Central Bank's next steps is raging as well. Some members want to continue printing euros and complete the Pandemic Emergency Purchase Program (PEPP), while others want to cut it back already in June. That has shaken the euro.
The calls for tapering down come amid improvement in Europe's COVID-19 statistics. After long weeks of frustration, it seems that vaccinations have a positive effect, bringing down cases, hospitalizations and deaths.
Infections are falling in Europe:
The German ZEW Economic Sentiment has hit a new high with 84.4, reflecting optimism in the old continent. Other figures were upbeat as well.
Eurozone events: Jabbing speed and PMIs eyed
Can Europe keep up its vaccination pace? The old continent is becoming more dependent on the Pfizer/BioNTech inoculation, which seems to yield dividends. The faster the old continent can immunize its citizens, the quicker it can open up.
After Spain ended its state of emergency and France announced easing steps, similar headlines would help support the euro. Southern countries need tourism to return at full speed to see a bounce in employment, economic activity – and eventually inflation that the ECB wants to see to a certain degree.
Speakers from the central bank may rock the euro with new comments about the bond-buying plan. If there is a majority that favors tapering, the common currency has room to rise, while talk of "deploying the full envelope" – printing all the euros promised – would boost EUR/USD.
An update on the euro area's Gross Domestic Product figures for the first three months of the year will likely confirm the 0.6% QoQ contraction initially reported. The revisions tend to stick to the original reads. The same goes for inflation data, which will likely show that price rises remain meager, both in the headline Consumer Price Index (CPI) data and in underlying inflation. Both hover around 1%, half the ECB's target.
The most significant publications come on Friday, with Markit's preliminary Purchasing Managers' Indexes for May. Has hope prevailed? While investors are concerned about bumps in the road of America's recovery, cautious optimism is likely to continue in Europe. The services sector is the key.
After the sector – which has suffered more under lockdowns – surpassed the 50 level, another advance is on the cards. Germany, the largest country, is set to see its Services PMI top that level, which separates expansion from contraction.
Here are the events lined up in the Eurozone on the forex calendar:
US events: Pickup in vaccines and Fed minutes
Will the US ever reach herd immunity? The slowdown in vaccinations – sometimes attributed to the suspension of Johnson & Johnson's jabs – has caused experts to doubt covid could be eradicated. However, the recent uptick in inoculations and the FDA's approval of Pfizer's doses for 12 to 15 year-olds has raised hopes of reaching more people.
Seeing this graph head higher would boost sentiment:
Source: New York Times
President Joe Biden's ambitious spending and taxing plans will likely remain on the back burner for another week. Nevertheless, Senator Joe Manchin, the most conservative Democrat in the upper chamber, is the key person to watch. He was able to shape previous bills. Markets will cheer lower taxes and more infrastructure spending while they fall if the president's plans are substantially reduced, as Republicans want.
The economic calendar kicks off in earnest on Monday, with construction sector figures for April. Both Housing Starts and Building Permits have likely remained buoyed last month.
The week's main release is the Federal Reserve's meeting minutes from the latest rate decision from late April. Back then, the bank stressed that inflation is transitory and that the economy has a long way to go. While the latest Nonfarm Payrolls point to bumps in the road, concerns about price rises are growing. What message will the minutes send?
It is essential to note that the document is updated until the last minute – allowing officials to convey a message to markets. If some Fed members expressed more concern about overheating, the dollar could rise. However, if some expressed deeper worries about the recovery, the greenback could slide.
Weekly jobless claims and Markit's preliminary Purchasing Managers' Indexes are also of interest, but the focus is on what the Fed thinks.
Here are the scheduled events in the US:
EUR/USD technical analysis
Since early April, euro/dollar has been trading above an uptrend support line and has recently bounced off this line again. That is a bullish sign. Moreover, the world's most popular currency pair trading above the 50-day, 100-day and 200-day simple moving averages (SMAs) benefits from upside momentum.
All in all, the trend is positive.
Above the April high of 1.2150, May's peak of 1.2180 is critical resistance. Further above, 1.2240 was the top level in February, and it is followed by 1.2310 and 1.2350.
Some support is at 1.2050, which is where the 100-day SMA hits the price. It is followed by the all-important psychological barrier of 1.20 and then by 1.1960, where the 100-day and 200-day SMAs converge. Further down, 1.1860 and 1.1840 await EUR/USD.
Inflation is coming – but what the Fed says about it matters more than the figures. A dose of dovishness from the bank's minutes and ongoing improvement in Europe may send EUR/USD higher.
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