FX.co ★ EUR/USD. Michigan's negative news knocked down the US currency

The EUR/USD pair surged to the level of 1.1805 at the close of the US trading session last Friday, ending the trading week on a hawkish note. The immediate reason for this price jump was the University of Michigan Consumer Sentiment Index, which is a very important leading indicator of future spending. It fell sharply in August, reaching 70.2 points (with the growth forecast to 81 points). This is the weakest result in the last 10 years (the last time the indicator came out in this area in December 2011) and one of the 6 largest falls in the last half-century. The accompanying communique to the report indicates that American consumers showed a sharp decline in the first half of this month, which is most likely associated with the spread of the Delta coronavirus strain.

The index itself is a secondary macroeconomic indicator. However, it currently played an important role in determining the movement vector of the EUR/USD pair. According to the latest published data, US inflation has shown the first signs of slowing down after a multi-month upward trend. The overall consumer price index in July was at 5.4% (as in June). In monthly terms, the overall CPI slowed its growth, reaching the level of 0.5%. This indicator was at the level of 0.9% in June. In annual terms, the core consumer price index, excluding food and energy prices, came out at 4.3%, while this indicator reached 4.5% in the previous month.

It can be seen that the main components of the July inflation data came out either at the June level or slowed down their growth. The published data suggested that US inflation has reached its peak values, after which it will either freeze at the levels reached, or begin to pull back, as previously assumed by the Fed Chairman Jerome Powell (although he predicted a slowdown in inflationary growth at the beginning of next year). In this case, the failed index from the University of Michigan played the "last puzzle" role, increasing investors' anxiety about the normalization of the Fed's monetary policy. After all, the latest inflation releases, paired with America's (and in the world) deteriorating epidemiological situation, allow Jerome Powell to take a wait-and-see and cautious position at least at the economic symposium in Jackson Hole (the conference is scheduled to start on August 28). This circumstance destroys the entire hypothetical construction of dollar bulls, who were counting on the tightening of the rhetoric of the head of the Federal Reserve at the symposium and the actual announcement of the curtailment of QE at the September meeting.

The rising uncertainty on this issue has weakened the position of dollar bulls all over the market, including in a pair with the euro. However, the European currency in this context looks more vulnerable, given the unequivocally dovish rhetoric of the majority of the ECB representatives. In general, only the President of the Bundesbank Jens Weidmann is now voicing hawkish rhetoric, calling for a tightening of monetary policy if the Central Bank needs to resist inflationary pressures. But his statements are ignored. Most of his colleagues insist on maintaining a wait-and-see attitude, especially amid the spread of the delta strain of coronavirus in European countries. It is expected that the European regulator will discuss the issue of curtailing the PEPP program in September (Christine Lagarde spoke about this at the end of the July meeting).

Is it possible to talk about a reversal of the EUR/USD trend in such fundamental conditions? In my opinion, any upward impulses for the pair can be considered only in the context of corrective pullbacks, which should be used to open short positions. Many experts believe that the underlying price pressure in the US remains "stronger than anywhere else among the G20 countries," so the US regulator will continue to voice "hawkish" intentions. And even if the Federal Reserve does not rush to make specific decisions, the corresponding rhetoric of the majority of Fed representatives will allow the dollar to look more attractive compared to the same euro, which is under the background pressure of the European Central Bank.

To sum up, it can be concluded that after the results of the latest inflationary releases, the probability of a hawkish decision has declined. This fact weakened the position of dollar bulls throughout the market. Nevertheless, the US dollar retains its advantage in the mid-term (and even more so long-term), especially when paired with the euro, due to the actual uncorrelation of the Fed and the ECB positions.

From the technical point of view, buyers of the EUR/USD pair could not consolidate above the resistance level of 1.1800 (the middle line of the Bollinger Bands indicator coinciding with the Tenkan-sen and Kijun-sen lines on the D1 time frame). If the buyers do not break through the level of 1.18 today, it will be possible to consider short positions with the first target of 1.1730 (the price of Friday's opening). The main support level is set at 1.1700 (the lower line of the Bollinger Bands on the same time frame).