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This week the US dollar is likely to recoup its losses. Many experts are making bullish calls on the greenback as they are expecting a string of upbeat economic reports from the United States. Fresh data may signal the growth of inflationary pressure as the country is gradually recovering from the coronavirus pandemic. As a result, life is getting back to normal.
Before we discuss this topic in detail, let's quickly look at the technical analysis of the EUR/USD pair. Notably, this week, there is a decrease in risk appetite as all the attempts of the bulls last Friday to regain control over the resistance level of 1.1910 were unsuccessful. Only a break of this level may push the pair way higher to 1.1945 and 1.1990. Yet, in order to take control over the pair, bears need to break the average border of the sideways channel at 1.1884. Only after they might break the lower border of 1.1859. The pair's further rally depends on this level. If bears push the pair below this level, traders will manage their Stop Orders. It will lead to an instant decline of EUR/USD to the area of 1.1828 and 1.1790.
US inflation
As I have mentioned before, the US consumer price index is one of the most anticipating reports this week. Statistics for March will help traders more accurately assess how the Fed's forecasts coincide with real indicators. If the report exceeds the expectations of economists (they are predicting an acceleration in monthly inflation by 0.5%) demand for the US dollar is likely to rise. The EUR/USD pair may slightly dip in the short term. Investors monitor inflation data to determine the likelihood of stronger price pressures, which may well occur against the backdrop of large-scale fiscal and monetary stimulus. The manufacturing sector is also projected to expand thanks to the easing of a number of quarantine restrictions and a spike in new orders. Thus, this sector is forecast to grow by 4%.
On Friday, the US Department of Commerce published a report on the producer price index (PPI). In March this year, the index twice exceeded the forecast value. According to the data, in February 2021, PPI jumped by 1.0% compared to January and increased by 4.2% compared to last year. The figures were much higher than analysts' forecasts. They had expected an increase of 0.5% and 3.8%, respectively. The sharp rise in prices has once again confirmed the opening of the US economy and its return to its former capacity. It creates upward pressure on prices amid steady demand and a spike in new orders. In any case, the growth of these indicators is bullish for the US dollar as the Fed is hugely likely to start reducing earlier the financing of stimulus programs.
Debates in ECB and EU Recovery Fund
Meanwhile, in the eurozone, policymakers are deeply concerned about delays in the rollout of the EU Recovery Fund. They are confident that this measure will ensure future explosive economic growth. European Central Bank policymakers stepped up their pressure on the government of the EU countries to get on with their joint fiscal stimulus, using stronger language to warn of economic chaos for the region if politicians move too slow. Bank of Italy Governor Ignazio Visco called the EU recovery fund "crucial" as it will help the economy revive quicker from the pandemic. ECB Vice President Luis De Guindos said it is "crucial that there not be unnecessary delays." Last week, during the meeting of the International Monetary Fund, ECB Vice President Luis de Guindos also criticized the leaders of various countries.
Notably, two weeks ago, Germany's top court temporarily blocked that nation's ratification of the €750 billion ($892 billion) fund's bond issue. All governments should sign off on that step before the fund can start. The slow pace of approval of spending plans and the expectation that money from the fund will not be distributed until the middle of this year already pose the risk of a slow recovery of the EU economy after the coronavirus pandemic. The United States has outperformed the EU in this matter thanks to the adoption of a $1.9 trillion stimulus package.
Economic reports
Friday's data showed once again the mounting difficulties for the euro area on the path to tackle the coronavirus crisis. According to Destatis, in February this year, German Industrial Production unexpectedly fell by 1.6% compared to the previous month, while economists had forecast a 1.5% rise. In January, industrial production contracted by 2%. Excluding energy and construction, industrial production decreased by 1.8% compared to the previous month. The production of capital goods declined by 3.2%, and intermediate goods by 1.0%.
In France, industrial production also declined in February this year after rising in January. The re-introduction of quarantine restrictions due to the new wave of the coronavirus pandemic affected the overall production rate. The INSEE report said industrial production lost 4.7% month-on-month after growing by 3.2% in January. Economists had forecast an increase of 0.5%. Manufacturing output shed 4.6%, while the production of transport equipment fell by 11.4%. On an annual basis, industrial production decreased by 6.6%.
Exports in Germany continued to grow in February. Yet, this data did not significantly affect the euro as the growth of this indicator coincided with the growth of imports, which recovered more than expected. According to the report, exports increased by 0.9% compared to the previous month after a jump of 1.6% in January. The figure was also slightly worse than the forecast value of 1%. Imports jumped by 3.6% after falling by 3.5%. The trade surplus decreased to €19.2 billion.
GBP
The pound sterling continued to lose momentum against the US dollar. The unrest in Northern Ireland, which did not subside even at the weekend, caused its decline today during the Asian session. A sharp surge in street riots that led to serious clashes with police in north Belfast is due to the fact that part of the Protestant community is dissatisfied with the special status of Northern Ireland after the UK's exit from the European Union. After the end of the transition, a number of businesses in the United Kingdom, mainly engaged in exports, began to experience problems due to the bureaucratic delays that appeared after the UK left the EU. Besides, lockdown measures remain in effect and people are tired of restrictions. Nevertheless, the British economy is dealing well with the coronavirus crisis, showing serious growth rates this spring. Therefore, the small downward correction of the pound sterling may be beneficial for traders who did not enter the market in time.
As for the technical analysis of the GBP/USD pair, everything depends on a high level of 1.3670. Its breakdown will lead to a decline of the pair to 1.3565. Before that, the intermediate levels of the downtrend movement may be 1.3645 and 1.3605. If buyers manage to consolidate at 1.3670, then bearish bias observed since the beginning of last week will come to an end. If the pair breaks above 1.3710, it may correct upwards to 1.3740 and 1.3780.
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