The greenback has recently been extremely volatile as investors have tried to understand when the Fed is going to start tapering the QE program and increase the interest rate in the wake of the economic recovery in the US.
The US inflation report published last Wednesday exceeded market expectations and revealed a sharp rise in consumer prices in April, thus boosting the US dollar.
However, USD's bullish momentum faded quickly. Last Friday, the greenback fell to the levels of the week before, losing all its gains.
The thing is that the Federal Reserve hurried to calm market participants down by saying that it was a temporary inflation spike and by willing to keep the current monetary policy unchanged in the long term.
In addition, disappointing data on the US came out at the end of last week, offsetting higher-than-expected inflation results.
Thus, US retail sales remained at the March level instead of expected growth of 1%. Industrial production advanced by 0.7% from the preliminary forecast of 1%. The University of Michigan's consumer sentiment for the US fell to 82.8 from 88.3 in April.
All these results indicate the uneven economic recovery in the US. Nevertheless, the outlook keeps improving.
The Fed's Patrick Harker expects US GDP to accelerate by 7% in 2021. Previously, the economy was projected to expand by 5-6%.
The regulator's next meeting is scheduled for June. The central bank may revise its forecast despite the unwillingness to taper the QE program.
Traders are awaiting the release of the FOMC minutes that is due on Wednesday.
Investors expect the regulator to hint at the possibility of tapering if the inflationary pressure keeps increasing.
According to the Commonwealth Bank of Australia, the FOMC minutes should confirm that the current inflation growth is a temporary phenomenon. Experts think the regulator is unlikely to consider the possibility of tapering.
These days, growing concerns over the introduction of restriction due to COVID-19 in Asia provide support for the greenback. Some Asian nations that previously led in the fight against the pandemic are now faced with new outbreaks of the virus.
Meanwhile, the vaccine rollout in Europe is ongoing. Moreover, the region is on the way to recovery. All this has a positive impact on the euro.
This week, EUR/USD may extend gains unless the Fed makes any hawkish announcements.
Apart from the FOMC minutes, the eurozone's Q1 GDP report and ECB President Christine Lagarde's speech may affect the pair. Market participants will also focus on PMI data in the US and the euro area.
According to Credit Suisse, as long as EUR/USD is above the key uptrend from the 2021 lows at 1.2071-1.2051, the current risks will remain upward. A breakout above 1.2152 will confirm bullish sentiment, and the price may return to 1.2182-1.2185 and even to stronger resistance in the 1.2212-1.2243 area ( the 78.6% Fibonacci retracement level). If the upward trend extends, the price may go up to the upper border of a wider range and this year's high located in the 1.2325-1.2350 region.
The material has been provided by InstaForex Company - www.instaforex.com