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Federal Reserve Chair Jerome Powell's rhetoric, which seemed "dovish" to the market, as well as pleasant surprises from the eurozone and unpleasant ones from the US, allowed the EUR/USD pair to mark the best weekly dynamics since May. The quotes grew on each of the five trading days, which has not happened since July last year. After Powell said that there is still a long time before raising the federal funds rate, and several strong US labor market reports are required to wind down QE, investors rushed to get rid of the US dollar. Isn't it a little early?
If the Fed decided to turn away from the path of monetary policy normalization chosen in June, it would show its fear of the Delta variant. On the contrary, Jerome Powell stressed that the economy has adapted to COVID-19 thanks to successful vaccination, government support, and consumer ingenuity. Indeed, for countries with a high level of fully vaccinated population, the pandemic is not terrible. Even in Spain, where the number of infections is growing by leaps and bounds, hospitalizations are rare.
Dynamics of infections and hospitalizations in Spain
The EUR/USD rally was fueled by weak US GDP statistics and strong European inflation and economic data. The gross domestic product in the United States in the second quarter grew by 6.5% against Bloomberg experts' forecast of 8.4%. The reason was negative stocks, which indicates supply problems. The recovery of the indicator in the third quarter is fraught with the acceleration of GDP to 8%.
In the eurozone, consumer prices exceeded estimates, rising to 2.2%. At the head of the entire bloc is Germany, where inflation reached an unprecedented level of 3.1% since 2008, after which the trade unions demanded an increase in wages, and Bundesbank President Jens Weidmann began to scare the CPI acceleration to 5% by the end of the year. In fact, the rise in consumer prices is underpinned by temporary factors such as the elimination of the sales tax increase and the restructuring of the basket. Things are even worse in the eurozone, where the main driver of the CPI rally is energy prices, while core inflation fell from 0.9% to 0.7%.
Structure and dynamics of European inflation
The economy of the currency bloc grew by 2% in the second quarter, exceeding forecasts, and, judging by the dynamics of business activity, it will continue to recover in July-September. It has a long way to go to return to the trend, while the US has already done so, and in 2022, may exceed the level expected before the pandemic.
Thus, divergences in monetary policy and the economic growth of the United States and the Eurozone are still present, which allows us to speak about the limited potential of the EUR/USD rally and recommend selling the pair on growth. Moreover, there is a report on the US labor market on the nose, which can catalyze the strengthening of the dollar.
Technically, there is a transformation of the Shark pattern to 5-0 on the daily chart of EUR/USD. A rebound from the resistances at 1.195 and 1.2015, and a drop in quotes below the support at 1.1875, which correspond to the 38.2%, 50%, and 23.6% Fibonacci levels of the CD wave, should be used for selling.
EUR/USD, Daily chart
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