FX.co ★ EUR/USD: ECB meeting and US inflation data maintains market equilibrium

Traders were very active on Thursday, but equilibrium was kept because on the one hand, the European Central Bank released optimistic statements, while on the other hand, US published better-than-expected inflation data.

To be more specific, the ECB kept its dovish stance on monetary policy, leaving interest rates low and volume of bond purchases unchanged. And even though there were no hints for a future policy change, many still expect the central bank to ease its programs much earlier than expected, especially since the EU economy is already recovering, thanks to the sharp improvement in the COVID-19 situation.

The Governing Council, chaired by ECB President Christine Lagarde, left interest rates near zero, and bond purchases at € 1,850 billion. The rate on deposits also remained unchanged at -0.50%, as well as the rate on loans at 0.25%. The central bank said these will remain low until inflation hits 2.0%. Bond purchases will also continue until the end of March 2022, or until the crisis ends.

ECB President Christine Lagarde also gave optimistic assessments on the EU economy, saying that the risks associated with its growth are now balanced. The latest data indicate a recovery in activity in the service and industrial sectors, and most likely in the second half of this year, growth will continue, thanks to the relaxation of quarantine restrictions. Lagarde also noted that over the medium term, economic recovery will be supported by stronger global and domestic demand, as well as continued support from monetary and fiscal policies.

As for inflation, Lagarde said it will show gradual growth, but in the long term, price pressure will remain moderate. That being said, the ECB forecasts GDP to jump 4.6% in 2021, and then to 4.7% in 2022. Meanwhile, inflation will grow to 1.9% in 2021, and then to 1.5% in 2022. The central bank did not say anything about cutting back its bond purchases.

With regards to the United States, the Department of Labor said CPI rose 0.6% in May, a bit higher than the expected 0.4%. The continued price pressure, albeit not as strong as in April, suggests that the US economy is recovering at a strong pace, and nothing can hinder its growth. The largest increase was due to the 7.4% jump in used car prices, followed by the 0.4% rise in food prices. Energy prices, on the other hand, remained unchanged. Excluding food and energy prices, inflation rose 0.7%. In terms of year-on-year data, consumer prices rose 5.0%, which is the largest increase recorded since August 2008. Unsurprisingly, the annual growth rate accelerated to 3.8%.

Considering this, it is likely that the Federal Reserve will no longer fend off investors and delay changes in monetary policy.

Aside from inflation, the US Department of Labor also released a weekly report on jobless claims, which showed a 9,000 decline to 376,000. The less volatile four-week moving average also fell to 402,500, its lowest level for the year.

Obviously, this means that the labor market is recovering, but given the volatility of its indicator, the growth may be uneven. For example, last Friday, the Department of Labor said the unemployment rate fell to 5.8%, from 6.1% in April.

As noted above, these factors kept the market equilibrium, so EUR/USD remained in a sideways channel. But today, a lot will depend on 1.2177, as a break above it will set off a larger jump towards 1.2215 and 1.2250. Accordingly, if euro declines below 1.2177, the quote will drop to 1.2144, and then to 1.2105.

Another statistics published yesterday were data on industrial production in Italy and France, which, even though different from the forecasts, did not affect the market in any way. Istat said industrial production in Italy rose 1.8% month-over-month, while production in France dropped 0.1%. The decrease in France was mainly due to the 0.3% drop in manufacturing output.