Technical details:
Higher linear regression channel: direction - sideways.
Lower linear regression channel: direction - upward.
Moving average (20; smoothed) - upward.
CCI: 86.4443
The EUR/USD currency pair continued to trade fairly calmly on Tuesday, showing no signs of panic ahead of today's US inflation report for April. We will talk about this report a little later, but in the meantime, I would like to note that at the beginning of the new trading week, the euro/dollar pair continues to trade calmly and exactly according to plan. We have repeatedly said that we expect a further fall in the US currency in 2021 and named one global factor as the reason – the factor of oversaturation of the US economy with trillions of dollars, which will inevitably cause both an increase in inflation and the depreciation of the national currency in the international currency market. It is a banal economic law. If one currency becomes more, its supply increases, then the price (exchange rate) falls. Thus, we continue to expect that in the near future, the euro/dollar exchange rate will reach its 2.5-year highs, which were updated at the very beginning of this year. In the longer term, we expect the pair to grow to the 30th level. Previously, we have already made calculations according to which the US dollar can lose at least 6-8 cents due to the infusion of 4-5 trillion dollars into the economy. And if by the summer the US Congress approves two more packages for $ 4 trillion, then in the next year or two, we will catch the euro/dollar pair in the range of 1.35-1.40. Naturally, the fundamental background can change at any time, but so far, there is no reason to assume anything like this. At this time, nothing interesting is happening in the European Union at all. The Alliance is just getting ready to form its $ 750 billion recovery fund, and its distribution will begin in the summer. In any case, even if these 750 billion simultaneously pour into the EU economy, they are unlikely to cause a strong fall in the euro currency since the amounts are poured into the US economy much more.
In the meantime, markets need to stop being hysterical about inflation in the United States. Recently, only a lazy person does not talk about inflation, and for some reason, everyone provokes panic because inflation has already increased to 2.6% y/y. For some reason, no one wants to recall the words of Jerome Powell, who said last year that the Fed would not control the growth of inflation above 2%, as it changes the approach to targeting this indicator. The Fed will now monitor medium and long-term changes to offset periods of low inflation with periods of high inflation. Thus, the Fed did not intend and is not going to tighten monetary policy or curtail the quantitative stimulus program just because inflation jumped by 2.6% y/y in a single month. At the same time, it should be understood that prices rose in April by 2.6% compared to April last year, when the pandemic was in full swing.
Moreover, core inflation (excluding changes in fuel and food prices) is much less than 2.0% y/y. Moreover, the latest report on Nonfarm Payrolls showed very well to all market participants that the US economy is only on the way to a full recovery. Some sectors of the economy are still experiencing problems. Accordingly, the last month's consumer price index may be an accident, or by the end of April, inflation may fall short of the forecast values, or in May, for example, begin to slow down. We want to say that when inflation is consistently higher for 6-12 months, then it will be possible to conclude that inflation has accelerated, and the Fed needs some measures to contain it a little now. It is exactly what US Treasury Secretary Janet Yellen said - "To prevent the economy from overheating." However, we should expect such decisions from Jerome Powell and the company not earlier than the end of 2021.
Moreover, in the coming months, the US Congress may approve two more stimulus packages for the economy for $ 4 trillion, and this money will also need to be taken from somewhere. Then it will flow into the economy. Thus, it is much more reasonable to wait until this money enters the economy and then adjusts inflation targets and monetary policy parameters. "I think it will take quite a long time for us to see an increase in inflation and employment growth in real data. I can't give you a specific time frame," said Charles Evans, Chairman of the Federal Reserve Bank of Chicago. "To achieve an average level of inflation over a certain period, you need to keep inflation above 2% for a while," said the president of the Federal Reserve Bank of Chicago. "So the 2.5% inflation rate doesn't bother me at all."
And we also want to remind you that even if the Fed aims to accelerate inflation to 3%, the acceleration of inflation is a harmful process for the national currency. In other words, stable and manageable inflation is good for the economy, but it devalues the US dollar. Therefore, if inflation continues to accelerate, this will create additional pressure on the US currency. We also recall another economic paradox: The United States benefits from a cheap dollar, so if the US currency depreciates, it is good for the US economy. Donald Trump repeatedly said it. And in the European Union, everyone started talking about the "too expensive euro" as soon as it strengthened strongly against the US dollar last year.
The volatility of the euro/dollar currency pair as of May 12 is 68 points and is characterized as "average." Thus, we expect the pair to move today between the levels of 1.2096 and 1.2232. A reversal of the Heiken Ashi indicator downwards signals a round of downward correction.
Nearest support levels:
S1 – 1.2146
S2 – 1.2085
S3 – 1.2024
Nearest resistance levels:
R1 – 1.2207
R2 – 1.2268
R3 – 1.2329
Trading recommendations:
The EUR/USD pair has consolidated above the moving average and continues its upward movement. Thus, today it is recommended to stay in long positions with targets of 1.2207 and 1.2232 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 1.2024.
