The US dollar at the beginning of this week slowed its growth throughout the market, and in some currency pairs is also actively losing its positions. This trend began on Friday, when contradictory data on the growth of us inflation were published. However, alarming signals came somewhat earlier, after the release of the April Nonfarm payrolls report. But traders ignored many negative aspects, emphasizing the positive aspects of published statistics. Now the emphasis has shifted again: the market has come to the point that "the glass is half empty, not full."
It is worth noting that the reaction of the market to the controversial macroeconomic statistics is multifaceted and time-consuming. After the last non-Farms were published, the demand for the dollar rose sharply, as the unemployment rate slid to 3.9%, setting an 18-year record. However, other components of non-Farms disappointed: the growth rate of the employed did not reach the projected level (164K instead of 190K), and the average wage again slowed to 0.1% on a monthly basis. This dynamic is absolutely not encouraging in the context of the prospects for accelerating the rate of increase of the fed's interest rate. But the fact of a record decline in unemployment has eclipsed all the negativity, and the dollar bulls are actively exploited the situation by increasing the demand for greenback.
At the moment, the euphoria has passed. Moreover, the market came to the obvious conclusion that even record-low unemployment without wage growth is virtually useless, if we talk about the probability of a fourfold hike in the rate this year. Inflation data released last Friday only confirmed fears. In monthly terms, the consumer price index, although out of the negative area, did not reach the forecast levels, being at around 0.2%. But the core inflation index (without volatile energy and food prices) disappointed both in annual and monthly terms. The situation is not catastrophic and will not affect the basic scenario of the Federal reserve, which involves a three-fold hike in the rate. Moreover, at the last meeting of the Fed, the regulator made it clear that exceeding the target inflation rate would not entail an automatic acceleration of the tightening of monetary policy.
Thus, pessimism regarding the determination of the members of the Fed returned to the market again. The Fed's policy is still stimulating, not restraining, so too much argument is needed to change the baseline scenario for this year, which still does not exist. Given this fact, the dollar gradually lost momentum for its growth, especially after a large-scale two-week rally.
Speaking directly about the euro/dollar, then in this case we are dealing with a price correction, which has matured for a long time. But the weakness of the US currency will not entail a large-scale growth of the pair. At least in the medium term. The European currency is under pressure from an array of fundamental and technical problems, so the upward dynamics of the EUR/USD is now due solely to the weakness of the US currency.
The slowing of European inflation made the euro a vulnerable currency. A widely announced completion of QE may not take place on time, if the consumer price index continues to show negative dynamics. This was said by Mario Draghi and other representatives of the ECB. In particular, on Monday, the head of the Bank of France Francois Villeroy stressed that the fate of the stimulating program depends on the rate of inflation. If the indicator does not recover in the coming months, QEs can be extended with an open completion date. True, amid such pessimistic warnings, the head of the French Central Bank made a rather unexpected remark. He said that after the completion of this program, the interest rate of the ECB could be increased in a few quarters (and not years). It is worth noting that the representative of the European Central Bank for the first time "decode" the phrase "for a long time", which is so often used by Mario Draghi.
The bulls of the eur/usd have seized on this information occasion, thus strengthening the corrective price growth. The dollar so far "allows" the euro to recover its positions, although growth potential is limited.
Technically, the pair may rise to the level of 1.2080, that is, to the average Bollinger Bands indicator line on the daily chart. To enter and gain a foothold in the 21st figure, we need further negative American statistics. The current week is not as eventful as the previous ones, but tomorrow will be published quite an important indicator – the volume of retail trade in the United States. The growth or decline in consumer activity will certainly affect the dynamics of the pair, provoking volatility. The consensus forecast indicates a slight decrease to 0.4%, but if this indicator returns to the negative area, the pair will continue its corrective growth.