12.05.202115:46 Forex Analysis & Reviews: Forecast for EURUSD and GBPUSD: The European Commission report is full of optimism.

The European currency strengthened its position against the US dollar today in the first half of the day but then slipped down before the important data on inflation in the US. The euro was supported by a published report from the European Commission, which revised its forecasts for the better. The eurozone economy will grow faster this year than previously forecast, as the vaccination campaign in the region continues to gain momentum and is already producing good results. Additional financial support and the recovery of the global economy contributed to the growth of exports, which are an integral part of European GDP.

According to the data, the European Commission raised its growth forecast for the currency bloc this year to 4.3% from 3.8%. Total production in the 27 EU member states is expected to reach its pre-pandemic level by the end of this year. The euro area is also projected to grow faster in 2022 when member countries receive money from the EU stabilization fund. But despite all the improvements, the recovery will continue to be uneven: the economies of France, Spain, and Italy will not reach pre-pandemic levels until next year.

The prevailing optimism about the prospects for the recovery of European countries has a positive impact on the European currency, steadily recovering in tandem with the US dollar. However, the pandemic can still affect the quality, strength, and duration of the recovery. The revised outlook brings the European Commission's expectations closer to a recent report from the International Monetary Fund, which last month raised its forecast for the eurozone to 4.4%. The European Central Bank will publish its expectations at its meeting in June this year.

But there is also a downside to the coin. The EC noted that unprecedented government support for businesses and households during the pandemic led to an increase in the eurozone's public debt to 100% of GDP last year. It is expected to peak at 102% and then drop slightly to 101% in 2022. Italy's debt alone will account for about 160% of GDP this year. However, none of the European countries is going to seriously abandon stimulating the economy at a time when its first signs of recovery have just begun to appear.

As for the European Commission's forecast for inflation, it is expected to reach 1.7% this year and then fall to 1.3% in 2022. Nevertheless, it is predicted that the price increase may be higher if the rebound is stronger than economists think. As for the risks, they will remain high until COVID-19 is brought under control by most countries.

As for today's fundamental statistics, it did not impact the European currency, as it completely coincided with economists' expectations. According to Destatis, Germany's consumer price index rose 2.0% year-on-year after rising 1.7% in March. Similar inflation was last recorded only in April 2019. The data matched all the preliminary estimates. Energy prices jumped 7.9%, while food prices rose 1.9%. Compared to the previous month, the consumer price index rose 0.7% in April, mainly due to higher food prices. Harmonized by EU standards in April increased by 2.1%.

In France, inflation hit a 14-month high in April this year, but the pace was below the initial estimate. A report from the Insee Bureau of Statistics said that consumer price inflation rose to 1.2% in April from 1.1% in March this year, while the initial estimate was 1.3%. Core inflation accelerated to 1% in April from 0.8% in March.

Data from the EU's Eurostat on Wednesday on industrial production pleased traders, as after a fall in February, strong growth was recorded in March this year. Industrial production rose 10.9% year-on-year after falling 1.8% in the previous month. Economists had a forecast growth of 11.6%. Compared to the previous month, industrial production increased by only 0.1% after falling by 1.2%. The largest annual increases were recorded in Italy, Slovakia, Hungary, and Poland, while the worst declines were recorded in Malta and Finland. A slight increase in industrial production in the eurozone in March suggests that the region's manufacturing sector is still far from normal. A persistent supply shortage outweighs the growth in demand. Most likely, this problem will continue in the future until the supply chains are normalized, and several large enterprises that were quarantined due to COVID will not start working at full capacity. Once the supply gap is overcome, strong demand will support the eurozone industry and the economy. It is expected to happen in the second half of the year.

As for the technical picture of the EURUSD pair, nothing changed much in the first half of the day. The focus of buyers is shifted to the protection of the large level of 1.2115. It is impossible to allow its breakdown, as the pressure on risky assets, in this case, will seriously increase, which will push the euro to a minimum of 1.2060. It will be possible to say that the buyers have finally seized the initiative after the consolidation above the resistance of 1.2150. From this level, the bulls will easily reach the next resistance of 1.2180, the break of which will resume the uptrend and open the way to new local highs in the area of 1.2235 and 1.2290.

GBP

The British pound recovered its position against the US dollar today after the Office for National Statistics ONS reported a less active contraction in the UK economy in the first quarter of this year. A smaller drop in retail sales at the beginning of the year helped partially offset the decline in GDP. Gross domestic product declined by 1.5%, after a 1.3% increase in the fourth quarter. Economists had forecast a 1.6% drop. The economy contracted again in the first quarter after growing for two consecutive quarters. On an annualized basis, GDP fell 6.1%, as expected. According to the ONS, the level of GDP remains 8.7% lower than it was before the pandemic in the fourth quarter of 2019.

On a monthly basis, GDP grew by 2.1% in March, the fastest monthly growth since August 2020. In February, GDP grew by only 0.7%.

Problems remain with the trade deficit, which rose to 11.7 billion pounds in March from 10.5 billion pounds in February. The positive balance for services amounted to 9.74 billion pounds. Consequently, the overall trade deficit rose to 1.96 billion pounds from 856 million pounds a month ago.

As noted in previous reviews, traders ignored the data for the first quarter of this year, as everyone was well aware that the second quarter would be very different. In the summer, the UK economy, after its full opening, could show the largest growth jump in its history.

As for the technical picture of the GBPUSD pair, the pair continues to trade in a sideways channel, and many traders expect it to strengthen further against the US dollar. A break in the resistance of 1.2160 will certainly lead to a larger movement of the pound up to the area of the 42nd figure and then to a larger high of 1.4240. If the bears are stronger after the US inflation data, which, of course, is unlikely, then only a breakdown of the 1.4105 level will lead to a larger sell-off of the trading instrument to the lows of 1.4060 and 1.3970.