The euro-dollar pair froze in anticipation. Tomorrow, the European Central Bank will announce its decision on the prospects for monetary policy, while assessing the growth dynamics of key macroeconomic indicators. On the eve of this important event, EUR/USD traders took a defensive position: the pair is trading in the 50-point range of 1.2150-1.2200 for the third day. Neither the bears nor the bulls dare to take active offensive actions, especially since key data on the growth of US inflation will be published tomorrow.
There is no doubt that the market will experience increased volatility tomorrow. The US report will determine the direction of the greenback's movement, while the results of the ECB's June meeting will only add fuel to the fire, strengthening or offsetting the momentum. The publication of inflation data coincides with the start of the press conference of ECB President Christine Lagarde, so there is no need to rush to trade decisions: her rhetoric can turn the pair in the opposite direction, unless of course the voiced theses and published figures "resonate".
Let's start with the ECB. A certain intrigue persists. On the one hand, the market has no doubt that tomorrow the central bank will keep all the parameters of monetary policy in the same form. But on the other hand, traders are looking forward to the text of the accompanying statement and Lagarde's press conference, given the previous events. With a certain degree of confidence, we can say that there was a split in the camp of the ECB. Despite the dominance of the dovish position, from some representatives of the ECB, you can increasingly hear hawkish notes. Representatives of the hawkish wing of the central bank point to the recovery of the eurozone economy, the active pace of the campaign to vaccinate the EU population against coronavirus, the improvement of the epidemiological situation and the easing of quarantine restrictions. In the context of these trends, some members of the central bank suggested that the central bank may soon decide to slow down the pace of bond purchases, contrary to previously declared intentions to keep the PEPP program in its current form "at least until March 2022."
European macroeconomic reports also provide indirect support for the hawks, which indicate that the eurozone economy is recovering much faster than earlier forecasts. In particular, the indicators of inflation growth in Germany came out in the green zone: on an annual basis, the German consumer price index continued its upward trend, rising to 2.5% in May. The indicator has been consistently rising over the past five months. The harmonized index of consumer prices similarly exceeded the forecast values-both in monthly and annual terms. The German report was followed by a pan-European release. The consumer price index in the eurozone rose to two percent in May, exceeding the forecast values. This indicator shows positive dynamics for the third consecutive month. The core index paused its decline for the first time in the last three months and again showed growth.
We were also pleased with the dynamics of the eurozone's GDP in the first quarter, the decline of which was less significant than previously expected by analysts. The decline in the GDP of the euro area countries was 0.3%, while earlier it was predicted a decline of 0.6%. In turn, unemployment has been steadily declining, reaching the 8% mark.
Given this dynamic of key indicators, some analysts suggested that the ECB may reduce the volume of asset repurchases in the third quarter, which it will announce on Thursday. In this case, the euro will receive significant support throughout the market, even against the US dollar. If the ECB maintains a wait-and-see attitude, the single currency will naturally come under pressure - but the downward trend of EUR/USD is likely to be limited to 1.2100.
Now a few words about tomorrow's inflation release. First of all, it should be noted that US inflation indicators affect the dynamics of dollar pairs only through the prism of hawkish comments from the Federal Reserve representatives. But until June 16, members of the Fed will not be able to comment on the published figures – according to the existing rules, they are required to maintain silence on the eve of the next meeting. Given this fact, we can assume that for the resumption of the dollar rally, May inflation should repeat the "April feat", significantly exceeding the forecast values. Moreover, the preliminary forecasts are ambiguous.
So, according to most analysts, in monthly terms, the consumer price index will slow down its growth. The overall CPI should come out at around 0.4% (m/m), after rising to 0.8% in April. In this case, the indicator will stop its consecutive growth, which lasted for five months. The core consumer price index (on a monthly basis) should demonstrate similar dynamics. In annual terms, a mirror situation is expected – both the general CPI and the core indices can update long-term records, rising to 4.7% and 3.4%, respectively. In my opinion, the greenback will receive significant support only if all the components of tomorrow's release are released in the green zone.
Therefore, tomorrow promises to be hot. On the eve of such important events, it is too risky to open trading positions on the EUR/USD pair. In such conditions, trading in dollar pairs is more like a game of roulette, where players are guided by luck, not calculation. Therefore, it is most expedient to take a wait-and-see attitude until the end of tomorrow.
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