Today's release of data on the growth of US inflation has once again demonstrated the current attitude of the market to the US dollar. Despite the fact that the published figures are extremely controversial, the majority of traders decided that "the glass is half full than the other way round", while increasing the demand for greenback. This suggests that even weak US macroeconomic reports are not able to reverse the southern trend of the EUR/USD pair. The attempt for corrective growth yesterday was not crowned with success, which confirms the attractiveness of short positions in the pair. Such a situation is due to several reasons.
The market focused on the strengths of today's release. Firstly, the core inflation without accounting for food and energy prices, has remained at 2.2% in annual terms compared to the negative forecasts of a decline to 2.1%. At this level, the base CPI released from November last year. On a monthly basis, the indicator also demonstrates stability since October 2018, which is at the level of 0.2% and today's release is no exception.
The consumer price index, taking into account the prices of food and energy, showed mixed dynamics. In annual terms, it exceeded expectations and was at 1.6% with a forecast of 1.5%. In contrary to optimistic forecasts of growth to 0.1%, it remained at the monthly level of zero, where it is since the end of autumn of last year.
Thus, the published figures could be interpreted by the market in different ways, both in favor of the dollar and against it. As you can see, the market followed the first path. Following the general tendencies in February, the EUR/USD pair returned to the 12th figure and headed for the nearest support level of 1.1260, which is the bottom line of the Bollinger Bands indicator on the daily chart.
At first glance, such a "favor" of the market to the dollar looks illogical, given the fact that the Fed has quite sharply softened its rhetoric at the end of last year. However, this fact remained in the shadow of more global processes. The latest data on China's GDP growth suggests that concerns of experts about the prospects for the world economy are fully justified. This is confirmed by the recently published forecasts of institutions including the IMF, the World Bank, the ECB, the European Commission and the relevant financial institutions of the EU countries.
Such pessimistic views suggest that EUR/USD traders should not expect a correlation of the monetary policy of the Fed and the ECB. Both regulators will not rush to increase the interest rate in the foreseeable future. At the beginning of the year, bulls of the pair maintained the hope of an increase in the ECB rate in the framework of 2018, however, recent events have reduced this probability to almost zero. Even Jens Weidmann, who for a long time maintained a "hawkish" position, actually acknowledged that the European regulator should be careful given the increased risks.
The risks in the eurozone have really increased and not only economic ones. A new hotbed of political uncertainty broke out in Spain. The fact is that the Spanish parliament today rejected the draft budget of the country for this year, which was prepared by the Cabinet of Ministers. The consequences of this decision can be quite ambitious as the resignation of the government, followed by early parliamentary elections. Today, it became known that the Prime Minister of the country will hold a government meeting on Friday and the outcome of which can be a decisive factor in a political context.
The likelihood of new elections that may take place this spring (approximately in May) is very high, given the number of deputies (191) who voted against the proposed budget. Only 158 parliamentarians voted for the document. The budget failed due to the position of the two Catalan parties that previously supported Sanchez, but now, their views have radically diverged. Hence, the Catalans left the socialists without support while the party members of Sanchez do not have a majority in parliament. By the way, if the worst fears of experts are confirmed, it will be the third election in Spain over the past four years. Regular political battles against the background of recent events in Italy and vague prospects on Brexit will put additional pressure on the European currency.
From a technical point of view, the trend is still downward. This is indicated by signals on all the "older" timeframes. On the daily, weekly and monthly charts, the Ichimoku Kinko Hyo indicator shows a bearish signal of "Parade of lines" and the price itself is between the middle and lower lines of the Bollinger Bands indicator. The estimated "ceiling" of corrective growth is located in the area of 1.1390, which is the lower boundary of the Kumo cloud on the weekly chart. To break through this level of resistance will not be easy with the overall negative fundamental background for the euro. The support level is 1.1260, which is the bottom line of the Bollinger Bands indicator.