01.09.202110:26 Forex Analysis & Reviews: Euro slumps despite weak US data

Euro rose on Tuesday morning, but then turned around and rapidly lost all its positions in the afternoon. It even failed to hold on to local highs even amid weak economic reports from the United States.

The reason why risky assets soared was the report from Eurostat, which indicated that inflation in the Euro area accelerated much stronger than expected. It reached an almost 10-year high, having risen 3% in August from 2.2% in July. This is the highest rate recorded since November 2011. Core inflation, which excludes energy, food, alcohol and tobacco, also jumped to 1.6%.

But the drivers were all temporary factors that are likely to disappear next year. So, by the end of 2022, headline and core inflation should return to below 2%, and then fall around 1% over the year.

In terms of month-over-month data, CPI was up 0.4% in August, thanks to the 2.7% jump in the prices of non-energy manufactured goods. Prices of food, alcohol and tobacco also rose 2.0%, while services increased by 1.1%.

In line with this, ECB member Robert Holtzman said the central bank should start discussing how and when it is going to taper incentives and focus on tools that will help reach an inflation target of 2%. But there are still many that are in no hurry to consider a scale back in programs, reasoning out that the current recovery is very fragile.

Meanwhile, other central banks such as the US Federal Reserve and the Bank of England have already announced their intention to cut back aid programs.

For example, earlier this week, the head of the Bank of France, Francois Villeroy de Gallo, said the central bank should take into account the more favorable financing conditions in the region, hinting that a slowdown in the pace of bond purchases may be inevitable ... This proves that more and more politicians are coming to the conclusion that it is time to start rounding off with incentives.

With regards to other macro statistics, the unemployment rate in Germany reportedly fell in July, which is a good sign of economic recovery. The figure fell to a seasonally adjusted 3.6%, from 3.7% in June. And to be more specific, the number of unemployed was approximately 1.56 million, which is 19,000 or 1.2% less than in June.

France also showed continued recovery, with inflation soaring to 1.9% in August. Month-over-month data was also up by 0.6%. And in terms of GDP, it observed a 1.1% gain in the second quarter, thanks to domestic demand. Household spending is also said to have risen 1.0%. Imports also jumped 1.7%, and exports by 1.0%.

In the US, consumer confidence reportedly deteriorated in August, dropping from 125.1 points to 113.8 points.

All this dealt a blow to EUR/USD, so a lot currently depends on 1.1820 because slipping below it will lead to a further decline towards 1.1790, 1.1760 and 1.1730. But if the pair climbs above the level, price will reach 1.1845 and then possibly jump to 1.1870 and to the 19th figure.