FX.co ★ The market is full of talk about inflation

Expectations that the European economy will show tremendous growth in the summer will be a severe test for central banks, which continue to stimulate policies and keep interest rates near zero. The question that concerns all managers is how long the current inflation rate will continue to rise and how soon it will affect the long-term expectations of companies and households. If everything happens fast enough, it will lead to a cycle in which higher prices will cause higher wage demands, while the unemployment rate will remain high enough, which will lead to even more price increases.

In theory, the European Central Bank expects the rise in inflation to be temporary. Price pressures may also encourage those central banks who believe that policy has been too soft for a long time. It may lead to talk of raising interest rates as early as the end of this year. However, the official position is that the surge in inflation will be temporary, and the recent increase is directly related to deferred demand, which will peak in the summer months. The prospect of accelerating inflation is evident due to several reports that we have recently released on the eurozone countries. Almost everywhere, there was a surge in inflationary pressure.

In today's report, Eurostat said that producer prices in the euro area rose in April mainly due to a jump in energy prices. Producer price inflation rose to 7.6% in April from 4.3% in March, which was higher than economists' forecasts of 7.3%. Core inflation excluding energy rose 3.5% year-on-year after rising 2.3% in March. Energy prices jumped immediately by 20.4%.

As recently as yesterday, a report was released indicating that consumer prices in the eurozone will rise to 2%, which is technically higher than the European Central Bank's target.

European Commission

Despite all this, the recommendations of the European Commission were published today, according to which the member states of the European Union have the right to continue to make independent decisions on incentive programs to cope with the damage caused by the coronavirus pandemic quickly. The European Commission's recommendations state that the budget deficit in most EU member states will increase in 2021 and remain above the nominal threshold of 3% of the gross domestic product prescribed by the bloc's rules. Only Denmark and Luxembourg will make exceptions. The commission said that a premature end to budget support would hinder the economic recovery, so reducing the budget deficit should not be the primary goal of the EU government in 2022.

"The recovery remains uneven as uncertainty remains high. Therefore, economic policy should remain supportive in both 2021 and 2022," EU Economy Chief Paolo Gentiloni said in a statement. "Our message today is that all countries should also keep investments funded from national sources."

The EU suspended its rules that provide for sanctions for excessive government borrowing after the coronavirus caused the sharpest recession in human history.

The commission also added that it is still difficult to assess with certainty the impact of rising public spending and the associated debt on the further recovery of the economies of the EU member states. "We call on member states to maintain a stimulating fiscal policy both this year and next while maintaining public investment," said Commission Vice-President Valdis Dombrovskis. "A rational mix of spending - with a focus on investment while maintaining control over other spending - will help the economy return to a more reasonable position in the medium term."

As for the fundamental statistics, according to Destatis, in April, retail sales in Germany fell much more than expected. Retail sales fell 5.5% month-on-month, interrupting March's 7.7% increase. Economists had forecast that sales would fall 2% in April. Year-on-year retail sales growth slowed to 4.4% from 11.6% in March. The main reasons for the decline in sales were the emergency braking at the federal level in the second half of April and the Easter weekend. Sales of food, beverages, and tobacco fell 3.4% from a year ago, while sales of non-food items in stores rose 10.6% in April.

In the afternoon, I advise you to follow the speeches of Fed officials Raphael Bostic and Charles Evans and the Federal Reserve System report, which will contain information on the prospects for economic policy. The expected developments are likely to continue to strengthen the US dollar. The risk of an inflationary surge still puts pressure on the markets, which further fuels the debate about reducing the quantitative easing program.

As for the technical picture of the EURUSD pair, much will now depend on whether the euro buyers will be able to regain control over the level of 1.2190. If so, then in the second half of the day, we can expect a more significant upward correction of the pair and an update of the resistance of 1.2210, from which today all the fall of the euro began. If bears retain their control over the market – in this case, you can count on a repeated decline in the trading instrument to the area of the minimum of 1.2165 and its breakdown. It will drag new bears into the market, which will lead to an update of a more significant local low in the area of 1.2135.

GBP

The British pound is reluctant to move down. However, the pressure on it remains. Today's data from the Bank of England that the number of allowed mortgages in the UK increased more than expected did not affect the GBPUSD pair, which searches for more important benchmarks for choosing a further direction. The report said the number of mortgages approved for home purchases rose to 86,921 in April from 83,402 in March. The level expected by economists is 84,980. Net mortgage lending fell to 3.3 billion pounds from a record 11.5 billion pounds in March. Economists had forecast a reduction in borrowing to 6.6 billion pounds.

As for the technical picture of the GBPUSD pair, the main goal of the bulls will be to return the level of 1.4140 to control. If this can be done, we can expect a more powerful bullish surge to the area of 1.4190, and there it is already close to the maximum of 1.4240. If the bears defend the 1.4140 area in every possible way, we can count on maintaining pressure on the pair and its return to the base of the 41st figure.