Today EUR/USD was making efforts to conquer the level of 1.19 amid the broad-based weakness of the US currency. For the whole day, the bulls of EUR/USD were testing resistance of 1.1890. If the level was surpassed, this would open the door towards the uptrend. Besides, the EU presented rather strong macroeconomic data which provided the euro with support. The GDP for the EU countries and inflation data printed upbeat scores, all beyond analyst expectations. Oddly enough, such positive figures did not ensure the uptrend of EUR/USD. Once the currency pair updated the highest level in a month (that is 1.1909), the price lost footing and retraced back towards 1.18. This is a meaningful occasion, especially in light of such significant data and bearing in mind weakness of the greenback.
The EU CPI released today at least did not discourage investors. The headline CPI climbed to 2.2% in July following a slowdown to 1.9% in June. Experts had projected to see a lower score at 2.0%. The core CPI excluding energy and food prices declined to 0.7% in July after a 1.9% increase a month ago. The consensus suggested exactly this result, so traders neglected the inflation report. Another thing, Germany's CPI published yesterday revealed the same dynamic. The headline CPI came out in the "green zone" both on month and on year. Citing experts, Germany's government is to blame for a sharp increase in consumer prices in the largest eurozone's economy. Struggling against the economic fallout from pandemic, the cabinet decided to lower the VAT that dragged down prices of many services and consumer goods.
Apart from inflation, investors welcomed data on the European economic growth. According to the consensus, the EU GDP was expected to rise 1.5% in Q2 2021 on a quarterly basis. However, in fact, the EU economic output expanded 2% sequentially. Let me remind you that the EU economy contracted 0.3% in Q1. The annual growth rate also surpassed expectations. The EU GDP increased 13.7% in Q2 from a year ago, stronger than the forecast for a 13.2% growth. The EU GDP fell 1.3% in Q1. Among the best performers in terms of economic growth are Portugal (4.9%), Austria (4.3%), and Latvia (3.7%). The weakest GDP was recorded in Lithuania (0.4%) and Czechia (0.6%). The powerhouse of the European economy, Germany, unveiled decent metrics. Germany's GDP grew 1.5% q/q in Q2 2021.
The icing on the cake in the flood of macroeconomic data today becomes data on the labor market. So, the unemployment rate in the euro area declined to 7.7%, the best score over the recent 12 months. Last time the jobless rate was that low on July 2020. Later on, it turned higher.
At first glance, the fundamental background should have encouraged growth of the single European currency across the board. Indeed, in some forex crosses, in particular EUR/JPY, the euro asserted strength. However, the euro jumped briefly against the US dollar but the spike blew itself our once the price reached 1.1909.
Why did EUR/USD respond with such a modest growth to the upbeat macroeconomic data? From my viewpoint, the main problem of EUR/USD bulls is the difference in the rhetoric of the Federal Reserve and the ECB. The European regulator gave the green light to the euro's weakness at its latest policy meeting. The new ECB strategy tolerates a temporary spike in inflation above the target level, thus enabling the regulator to turn a blind eye to such spikes. This strategy postpones the moment of a rate hike indefinitely. Most experts believe that the ECB will dare to raise the key policy rate not until 2024. Some of analysts make a more cautious forecast, projecting the first rate hike in 2025. As for the QE program, the regulator has not provided any hawkish hints yet. ECB President Christine Lagarde said that clear decisions on the prospects of monetary policy will be made at the policy meeting in September. Besides, the ECB will present updated economic forecasts. According to insider information by Reuters, the ECB is unlikely to review the PEPP program in September because of uncertain prospects of the pandemic developments.
At the same time, all ECB policymakers acknowledge that a recovery in the EU economy is going on faster than expected. Christine Laragde reckons that the ECB should not make hasty decisions on the bond-buying program. That's why the series of macroeconomic data released today did not impress traders. Indeed, the ECB will stay pat on its policy in the foreseeable future.
All in all, the dynamic of EUR/USD today is crucial in the context of prospects of the currency pair. Despite increases in the key economic metrics (both the ones for Germany and the pan-European ones) as well as the broad-based weakness of the US dollar, EUR/USD buyers failed to overcome resistance of 1.1890 and hold the price firmly above 1.19. It means that the pair climbed to a higher level. 1.1890 serves as the upper border of Bollinger bands on a daily chart, 1.1815 is seen as the medium line of the Bollinger Bands indicator in the same timeframe. The main target of the downward move remains the level of 1.1750 which is the lower border of Bollinger Bands in a daily chart.
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