12.05.202111:15 Forex Analysis & Reviews: EUR/USD: US dollar resists inflation, while the euro takes advantage of the situation

The current efforts of the US currency are focused on maintaining the gained positions, although it continues to weaken. In turn, the Euro currency took advantage of the situation, rising from previous levels on the wave of positive macro statistics

It can be recalled that the US dollar declined to a new two-and-a half month low on Tuesday. The action of investors, who expect that rising American inflation will become a bomb for the US dollar, is the reason for this collapse. The situation is worsened by a surge in inflationary expectations in the US, which turned out to be a record over the past 15 years. Recently, the growing inflationary expectations have supported the USD, since investors have been counting on a rise in interest rates in response to higher prices. However, the situation has dramatically changed: the recent disappointing US employment report triggered a widespread sell-off in the national currency.

At the moment, market participants expect the Fed to keep interest rates low and continue the asset purchase program. In view of this, experts emphasize that a strong rally in the dollar is unlikely. In contrast, the surprising macroeconomic employment report triggered a massive dollar sell-off. Market participants believe that US inflation will amount to 3.6% in annual terms due to a prolonged reduction amid COVID-19.

The Euro currency, in turn, took advantage of the chance to rise amid the falling US dollar. It increased by 0.35%, namely to the level of 1.2170 on May 11. The euro was around the two and a half month high reached during the previous session. At the end of March 2021, the specified currency added 4%, offsetting a five-month decline. It should be noted that the euro was supported not only by the widespread weakness of the US dollar, but also by the actions of investors who were waiting for comments from the US monetary authorities before the release of the inflation data. A report on this issue is scheduled on Wednesday, May 12.

Earlier, it became known that the index of investor sentiment in Germany in May surged to the peak level recorded since the beginning of the pandemic. According to analysts at the ZEW Institute, the indicator of economic sentiment of German investors rose to 84.4 points from the previous 70.7 points, which is the highest level since February 2000.

The current situation was favorable for the euro. The positive outlook on the prospects for the European economy stimulated its confidence. According to experts, the euro is growing in anticipation of an economic recovery in the euro zone in the second half of 2021.

In the current situation, the EUR/USD pair may receive support amid the general weakness of the US dollar. On the morning of Wednesday, the main currency pair was trading at the level of 1.2127, having pulled back from previous levels. At the same time, experts believe that it is difficult for the pair to break through the current resistance level, which is in the range of 1.2130-1.2140.

According to Rabobank's currency strategists, the euro will maintain a stable position against the dollar in the near future. The growing yield of US government bonds and the economic prospects of the euro zone are in the hands of the European currency. Meanwhile, the Fed's "dovish" strategy had an important impact on the further dynamics of the EUR/USD pair. Earlier, representatives of the regulator said that inflationary pressure will ease in the next few months, although the final recovery of the US economy is still far away. Rabobank emphasizes that this restriction is reflected in the nominal yield of the bonds and in the value of the US dollar.

Analysts said that the current adaptive policy of the Fed significantly affects the yield curve of US government bonds and the dynamics of the US dollar. They believe that if the current strategy of the regulator continues, the USD will have to turn on the "survival mode" and make a lot of efforts to stay afloat.