Home Forex Market Analysis EUR/USD Rally Accelerates As Traders Downplay Fed Tightening Risks

EUR/USD Rally Accelerates As Traders Downplay Fed Tightening Risks

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EUR/USD Rally Accelerates As Traders Downplay Fed Tightening Risks

The EUR/USD rallied this week even after the divergence between the United States and the European Union remained clear. The pair is trading at 1.1958 on Friday morning, up by more than 2% from the lowest level this month.

US economy rebounds

Data released by the United States recently showed that the economy is firing on all cylinders. Last week, numbers by the Institute of Supply Management (ISM) revealed that the manufacturing and non-manufacturing PMI remained above 50 as demand and optimism rose. 

Also, the recent non-farm payroll numbers showed that the economy added more than 900k people as the overall unemployment rate fell.

This week, data by the Labour and Commerce Department have also been robust. The numbers revealed that the headline consumer price index (CPI) surged to 2.6%, while the core CPI surged to 1.6% in March. 

On Wednesday, data showed that retail sales jumped by 9.8% in March, leading to a year-on-year gain of 28.16%. Core retail sales rose by 8.4%. Most importantly, the number of people filing for initial jobless claims dropped to 576,000.

The EUR/USD rose even after the good news because the market is unconvinced that the recent recovery numbers are permanent and the fact that the Fed has ruled out any tightening. 

As you recall, the American government passed a $1.9 trillion stimulus package in March. These funds included a one-off $1,400 checks to individuals and enhanced the unemployment benefits. Therefore, it seems like most people boosted their purchases. As such, as their funds run out, the people will start slowing their purchases.

Another reason is that gasoline was a key contributor to consumer prices. This happened as the price of crude oil surged to a multi-month high of more than $70. However, recently, this momentum has faded, and oil is trading at around $64. 

As a result, while the US published high inflation numbers, US bond yields declined, as shown below. Also, the dollar index continued to decline.

US 10-year and 30-year yields

US 10-year and 30-year yields

EU still struggling

Meanwhile, the European economy is still struggling. The bloc has lagged behind other countries in delivering the vaccine shots. It has only vaccinated less than 15% of its total population while the United States and the UK have vaccinated more than 30%. While the bloc is ramping up the process, there are signs that it will take longer. 

Data released this week showed that the bloc’s retail sales rose at a slower rate in February as most countries implemented lockdowns. Inflation has also lagged. On Thursday, data showed that the Italian inflation is at 0.8%, while in France, it is at 1.1%. In Germany, the biggest economy in the bloc, CPI has risen to 1.7%. These numbers are below the ECB target of 2.0%.

EUR/USD technical analysis

EUR/USD technical analysis

Turning to the daily chart, we see that the EUR/USD pair has bounced back in the past few days. This happened after it reached the 38.2% Fibonacci retracement level at 1.1690. It has now moved above the 23.6% retracement level. Also, it is slightly below the lower line of the Schiff pitchfork tool. The 25-day and 50-day Hull Moving Average (HMA) have also made a bullish crossover. 

Therefore, in the near term, the pair may continue rising as bulls attempt to retest the year-to-date high at 1.2347, which is more than 3% above the current level. However, another drop to the 38.2% retracement at 1.1690 is also possible.

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