The dollar temporarily strengthened amid rising inflation in the United States

13 May 2021

Andrey Maslov, analyst, FINAM Group

On Thursday, May 13, EUR / USD rallied 0.11% to reach 1.2084. Despite the correction in the dollar this morning, the US currency gained support from rising inflation in the US, fueling fears that this could push the Fed to abandon the ultra-soft monetary policy sooner than the regulator anticipated. The DXY dollar index is up 0.01% and is trading at the 90.73 level.

Inflation accelerated in April to 4.2% YoY in April, well above the 3.6% YoY consensus forecast, and hit its highest level since 2008, according to data released on Wednesday. The yield on 10-year US Treasuries, in turn, rose to a five-week high above 1.70%, increasing the attractiveness of dollar assets, but then fell again to 1.685%.

However, Fed officials argue that price increases remain temporary and should not be a catalyst for changes in the central bank’s monetary policy. For example, St. Louis Fed Chairman James Bullard on Tuesday acknowledged the progress made by the US economy, but said that the time had not yet come to tighten monetary policy. Today, Thursday, he will give a speech again, this time investors are awaiting a reaction to the inflation data. Also, market participants will turn their attention to the weekly statistics on jobless claims in the US, due out later Thursday, and retail sales data on Friday, to see if the upward pressure on prices in the US will continue.

The European Union published a fresh economic forecast for the EU countries yesterday. According to updated estimates, the bloc’s economy will grow by about 4.2% in 2021, and by 4.3% in the eurozone countries. However, in 2022, both the EU and the Eurozone are projected to grow GDP by 4.4%. Recall that earlier the forecast for the EU and the eurozone for 2021 was 3.7% and 3.8%, respectively. However, despite the statement of the EU Commissioner for Economic Affairs Paolo Gentiloni that “the shadow of the coronavirus is falling from the European economy”, it is worth noting that the volume of external debt in the bloc countries averaged 102% of GDP. At the same time, the improved outlook certainly pushed the single European currency to strengthen.

As for macroeconomic statistics, yesterday in the US the inflation data for April became known, which amounted to 0.8% (m / m), which turned out to be significantly higher than analysts’ forecasts of 0.2% (m / m) and the March result in 0.6% (m / m). On an annualized basis, inflation data was presented above. Placement of 10-year government bonds took place at the level of the previous month at 1.684%.

In Germany, the final inflation data for April was also released, which showed a result of 2% (y / y), which coincided with the preliminary estimate and turned out to be higher than the previous result of 1.7% (y / y).

The eurozone published data on industrial production in March, which increased by 10.9% (y / y) compared with a fall of 1.8% (y / y) in February and a consensus forecast for growth of 11.6% (y / y). / d). However, on a monthly basis, production increased by only 0.1% (m / m) compared to the forecast of growth by 0.7% (m / m) and the result for the previous period of -1.2% (m / m).

Today we should pay attention to the publication in the US of data on the PPI for April, as well as on the initial applications for unemployment benefits for the week.

EUR / USD dropped below the resistance line at 1.2150 and is trading at 1.2084. Stochastic lines have left the overbought zone and are directed downward, which indicates the possibility of a decline in the instrument in the short term.

This information is not investment advice.

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