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#1 22-02-2021 09:07:46

johnedward
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EUR/USD: Major questions regarding the return of inflation

EUR/USD: Major questions regarding the return of inflation


The euro regained a few pips against the dollar on Friday, with relief from the very first estimates of activity barometer indicators for the current month. For the Euro Zone as a whole, the "PMI Services" came out at 44.8, but it is on the industry side that the surprise is particularly pleasant (57.6, significantly above consensus), thanks in particular to the German compost industry, above 59. As a reminder, a score above 50 points means an expansion of the sector under consideration.

Chris Williams, Chief Economist at IHS Markit, comments on the latest figures from the PMI Flash survey as follows: "The measures taken against the virus continued to have a strong impact on the performance of the euro zone service sector last month, making a further decline in GDP increasingly likely in this first quarter. However, as the effects of the downturn in the service sector have been tempered by stronger growth in the manufacturing sector, the economic contraction is expected to be much smaller than in the first half of last year. Indeed, manufacturing output in the euro area recorded one of its strongest increases in the last three years last month, thanks in particular to a very strong performance by Germany's manufacturing sector, which continues to perform impressively, and a trend towards increased production in the rest of the region".

At the heart of the week, however, the euro, the risky currency par excellence, was penalised by the fear of a return of inflation, or rather too rapid a rate of price increases, provoked by a sustained economic recovery, particularly on the other side of the Atlantic. This is particularly true in view of the publication of retail sales, which rose sharply in January (+5.2% on a monthly basis), well above the target, according to the latest data published by the Census Bureau last week. Sales were largely inflated by the cheques given to households hardest hit by the virus situation. The producer price index also beat expectations, as did the monthly federal industry report.

On Thursday, the "Philly Fed" (23.0, above expectations), housing starts and building permits confirmed this state of affairs. And the weekly registrations for unemployment benefits, up slightly to 862,500 for last week, still militate for a quick vote in Congress on a new budgetary aid plan close to the envelope initially proposed by Biden at 1,900 billion dollars.

Does this coming inflationary "push" worry the Fed? "Not as things stand," according to Vontobel AM research. "In fact, it is likely that it will welcome it to some extent since the increase in inflation forecasts will support its objectives. In view of the number of jobs to be recreated, the company does not intend to take an immediate look at its monetary policy, but the job creation curve will have to be carefully monitored".

"The Fed's areas of vigilance lie more in the pace at which interest rate markets are moving. Rising treasury bill yields are not a bad thing in themselves. From a bond investor's point of view, it's even a very positive sign, and it will help us to adopt a more balanced positioning in the future. However, if sovereign yields continue to rise, this could lead to a tightening of financial conditions and a fall in bond prices, which could spill over to other asset classes".

As of right now, the pair is trading at $1.2104.

KEY CHART ELEMENTS
Exceeding the 20-day moving average (in dark blue) invites us to take a "time out". The inscription of a significant high wick (shadow) on the candle of the day would, if necessary, change the situation, but we are not there yet. Neutral advice for the immediate future: active traders should therefore avoid taking a stand until a suitable entry point is found.

MEDIUM-TERM FORECAST
In view of the key chart factors we have mentioned, our opinion is neutral in the medium term on the pair's exchange rate.

We will maintain this neutral view as long as Euro Dollar (EURUSD) rates are positioned between support at $1.2099 and resistance at $1.2210.

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