FX.co ★ Overview of the EUR/USD pair on May 21: inflation

4-hour timeframe

Technical details:

Higher linear regression channel: direction - upward.

Lower linear regression channel: direction - upward.

Moving average (20; smoothed) - upward.

CCI: 79.8646

The EUR/USD currency pair stopped falling on Thursday and could not even work out the moving average line. Thus, the upward trend persists without options. However, we recognize that the Fed's protocol has indeed become a little more "hawkish" than it was previously. But we also believe that economists and analysts have once again stirred up a fuss about inflation and possible actions of central banks. We'll talk about this later. In the meantime, it should be noted that nothing has changed for the US currency during the past day. Previously, a change in the rhetoric of the Fed (or ECB) has always been able to cause a severe surge in volatility and even a change in trend. If Jerome Powell or Christine Lagarde (or the previous heads of the Central Bank) suddenly told the markets something new or hinted at a possible change in monetary policy, it also meant severe changes in the economy. The US dollar has strengthened by 50 points after the Fed minutes hinted at a possible curtailment of the quantitative stimulus program. 50 points. It is even less than the average pair goes from minimum to maximum per day.

Thus, a particular reaction to the protocol was for the first time in a long time. But this is a reaction from the category of "traders saw what they wanted to see." Recall that for several months, the Fed should start thinking or talking about a possible curtailment of the QE program, which currently amounts to at least $ 120 billion a month. It seems that the markets will be relieved if Powell publicly announces that QE may be adjusted in the future. Did you hear it on Wednesday, and what has changed? The dollar is still getting cheaper, and the timing of this QE adjustment is still unknown. Inflation is now just the number one topic for all experts, economists, and analysts. As if you could expect anything else after the US government and the Fed poured almost $ 10 trillion into their economy.

Let's go back to the Fed meeting. The only phrase that deserves attention is: "If the economy recovers at the same pace, it will be appropriate to start a discussion about adjusting asset purchase plans." When this happens, the discussion of the growth of the American economy remains behind the scenes. For example, for the second quarter, the forecast for US GDP is 12.9%. Will this increase be enough to start talking about an adjustment or not? The same goes for inflation. The whole market is just panicking. At the same time, the panic is based not on the actual value of inflation but on the fact that it is growing and will continue to grow. Nothing extraordinary is happening. All investors have long understood that the trillions of dollars pouring into the economy will not pass in vain and unnoticed.

Moreover, the acceleration of inflation was the goal of the Fed. The Fed deliberately stimulated price growth. Now, when these prices have started to rise (only two months), there is a panic in the markets, which does not affect the charts of the movement of currency pairs. Because this panic is only for the sake of the panic itself. Earlier this week, the Governor of the Bank of England, Andrew Bailey, said that the surge in price growth would be associated with higher energy prices. A little earlier, many experts noticed that the March and April inflation indicators have a very low base. In March and April of last year, inflation slowed down significantly (almost to zero). Now, as the economy tries to reach the pre-crisis growth trajectory, prices were compared with those "zero" values of inflation a year ago. If the global crisis and lockdown had not started in March-April 2020, prices would have continued to grow by 1.5-2%, and current inflation rates would have been much lower.

Moreover, Jerome Powell himself has repeatedly stated that the Fed will allow inflation to stay above 2% for some time to compensate for periods of low inflation, according to the Fed's new approach to this issue. Oil has increased in price over the past year. Of course, it is not entirely correct to compare prices a year ago, when Brent fell to zero and even to the negative area. But even compared to last summer, prices have increased. Accordingly, we can say that oil prices have recovered to pre-crisis values. Thus, they grew very strongly in absolute terms by at least $ 20.

Consequently, this causes an increase in prices since fuel and oil are still used everywhere. Fuel prices have increased, and prices for transportation, products, and so on are also rising. Thus, the growth of inflation in the US is expected and logical. Moreover, Jerome Powell and other Fed officials are right when they say that this spike in inflation is temporary because the subsequent base months of last year are already higher. Oil has stopped rising in price recently. Therefore, most likely, inflation will accelerate in May.

Well, as for the attitude to the euro/dollar pair of all the above, there is practically none. We have already said that the pair reacted to the Fed's protocol with a 50-point decline in quotes, after which it calmly resumed its upward movement. Thus, we still state that the pair's movement is now influenced only by global fundamental and technical factors, which we talk about almost every day. The news from the category "the Fed has thought and decided that perhaps sometime later, if the economy continues to grow, we will think about starting to wind down the QE program" clearly cannot affect the global trend.

The volatility of the euro/dollar currency pair as of May 21 is 64 points and is characterized as "average." Thus, we expect the pair to move today between the levels of 1.2153 and 1.2281. A reversal of the Heiken Ashi indicator downwards will signal a new round of corrective movement.

Nearest support levels:

S1 – 1.2207

S2 – 1.2146

S3 – 1.2085

Nearest resistance levels:

R1 – 1.2268

R2 – 1.2329

Trading recommendations:

The EUR/USD pair resumed its upward movement. Thus, today it is recommended to stay in long positions with a target of 1.2268 until the Heiken Ashi indicator turns down. It is recommended to consider sell orders if the pair is fixed below the moving average line with a target of 1.2085.