Euro rallied last Friday in anticipation of more positive economic projections from the European Central Bank (ECB). In fact, during the last meeting, members said EU inflation will hit the target rate in the coming years, thanks to the bank's super-soft monetary policy.
Of course, such expectations sparked debates on when the ECB will begin scaling back its massive € 1.85 trillion bond purchase program, which is expected to run until March next year. At the time of writing, purchases have already reached the highest monthly volume since July 2020, hence, there is a chance that slight changes may happen at the next meetings. But most likely, decisions will be announced by September or beyond, after the ECB has properly assessed the EU economy.
In the meantime, the main task of the central bank is to choose the right actions to avoid an overheated economy, and at the same time to prevent an abrupt ending of bond purchases.
All this initially resulted in a sharp rise in the US dollar, but after the US released weak reports on its economy, demand for risky assets surged, thereby pushing the rate of the euro up.
Now, a lot depends on 1.2150 as a break above it will fuel a much larger jump towards 1.2180. But if the quote consolidates below the level, euro will drop to 1.2055.
With regards to the United States, employment growth in the non-farm sector slowed last April, contradicting the sharp increase many analysts have projected because of the good vaccination pace in the country. Instead of around 978,000, nonfarm payrolls rose by only 266,000. Meanwhile, the unemployment rate jumped to 6.1%.
These data reinforced expectations that interest rates will remain low for a long time.
As for retail sales, the Department of Commerce said the figure stayed the same because the lower sales in other segments offset the continued growth in auto sales. In fact, if that segment is removed, we will see that the indicator has actually fallen by 0.8%. The main reason was the decline in demand for apparel, accessories and musical instruments.
Growth in industrial production slowed as well, dropping to only 0.7% in April. Nevertheless, it is clear that utilities and manufacturing are recovering, hence, capacity utilization jumped to 74.9%.
With regards to inflation, its sharp rise has resulted in an increase in import rises, more specifically to 0.7%. Analysts expected it to rise by only 0.6%.
On a different note, the Biden administration is set to announce the truce it reached with the EU regarding metal tariffs. This issue has long been a controversy, especially when both countries were retaliating against each other.
Back in 2018, Donald Trump imposed duties on steel and aluminum from Europe, Asia and other countries over risks to US national security. Since then, the EU has retaliated and was expected to double tariffs on US goods effective June 1.