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10.06.2021 05:44 PM
EUR/USD: ECB policy announcement and soaring US inflation. The devil is in the detail

Consumer inflation in the US has hit another record high. The CPI surged to 5% in May in annual terms. Such a record inflation growth was last seen in the summer of 2008 and back in 1991. The CPI rose to 0.6% on month instead of the expected slowdown to 0.4%. Likewise, the core CPI logged notable growth. The core CPI excluding prices of food and energy jumped to 3.8% on a yearly basis that is also a multi-year record. The indicator climbed to 0.7% on month, stronger than expected. In other words, all components in the inflation report printed high scores for the second month in a row.

First, the market gave a muted response to the data. EUR/USD declined to the lower border of the trading range of 1.2150 to 1.2250. But the bearish momentum faded immediately. Moreover, the buyers managed to enter the market, pushing the price back up to about 1.2200.

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Such an abnormally quiet response is caused by several reasons. The US dollar fell prey to the market rule: buy the rumor – sell the fact. Yesterday, the greenback perked up without a weighty reason and began picking up steam across the board. The US currency followed yields of US Treasuries ahead of the inflation report. Therefore, once expectations of rampant inflation came true, traders locked in profits, thus putting pressure on EUR/USD.

Another thought, the publication of the US inflation data coincided with the beginning of the press conference by ECB President Christine Lagarde. Hence, a lot of market participants did not rush to open positions on EUR/USD bearing in mind only the inflation data. Accompanied by dry wording of the policy statement, the rhetoric of the ECB leader rocked the currency pair, thus triggering higher volatility.

45 minutes before the press conference, the ECB posted the policy update which is bearish for the single European currency. In a widely expected move, the regulator maintained all settings of monetary policy the same. The key interest rate was put on hold at zero. The deposit rate remained at -0.5%. The asset-buying program (PEPP) also was left at the same volume (€1.85 trillion). All these policy decisions did not come as a surprise. Traders were more interested in the prospects of monetary policy on light of the hawkish rhetoric of some ECB policymakers. Notably, the main statements cooled down the zeal of EUR/USD buyers. The central bank confirmed that it would follow the PEPP program at least until March 2022. The ECB doves used to unveil such plans before, so the dovish rhetoric made a minor impact on the currency pair.

Remarkably, following the press conference by the ECB leader, EUR/YSD again climbed having won back some losses. Nevertheless, the US inflation data did not allow the bulls to develop the uptrend and break through 1.2200. Both a 1-hour and 30-minute charts reminded a seesaw. Indeed, the buyers and sellers were regaining control over the pair from each other. At the moment of writing this article, the standoff between the bulls and the bears is going on. Now the pair is trading in the neutral territory in a range of 1.2150 to 1.2200, displaying impulses up and down.

Who will win this standoff? Well, despite visibly signals, like the ECB dovish policy decision and record inflation acceleration in the US, the overall picture is rather confused.

For example, on the one hand, Christine Lagarde expressed dovish rhetoric, though she kept optimism about an economic recovery in the EU. In particular, she said that the economic activity in the Eurozone is set to get into gear in the second half of the year amid easing lockdown measures. So, the ECB upgraded the GDP outlook for 2021 and 2022. From the viewpoint of the ECB experts, the economy could expand 4.6% this year, stronger than +4.0% growth in the previous forecast. The economic output could increase 4.7% in 2022, up from +4.1% in the previous forecast.

Commenting on the last inflation reports for the Eurozone, Lagarde in essence echoed the rhetoric of the Federal Reserve. She thinks that inflation acceleration comes as a result of the low base effect of the last year, temporary factors, and rising energy prices. The ECB reckons that consumer prices will carry on growing in the second half of the year until temporary factors disappear.

To sum up her speech, the ECB head stated that it is premature to taper the PEPP, though the regulator will put this question on agenda. She pointed out that the status quo decision was taken by the ECB policymakers unanimously.

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Amid the contradictory and cautiously optimistic rhetoric of Christine Lagarde, the US inflation report lacked any ambiguity. Nevertheless, the dollar bulls did not take advantage of the report. The thing is that inflation indicators make an impact on dollar-related currency pairs only through the prism of the hawkish remarks of the US Fed. If the Fed policymakers neglect inflation data (like it was with the PCE which hit a fresh multi-month high), the US dollar responds in the same way to the CPI. That's why the fact that the CPI has been logging record growth for the second month straight is not the reason for the US dollar's rally. I admit it looks like an absurd. At the same time, the Fed's representatives are not able to comment on the inflation data for May in the near time. The regulator mush keep silence 10 days before the policy meeting. The nearest meeting is scheduled for June 15-16.

All in all, despite the seemingly clear-cut interpretation of the events which happened today, traders find it hard to determine a trajectory for EUR/USD. The devil is in the details. This proverb explains the best the current situation. Amid ongoing uncertainty, it is too early to opt for long or short positions on EUR/USD. In the coming 24 hours, the pair will find out its direction for sure. However, before it happens, the risk is high to encounter impulsive and fake moves. So, it would be better for traders to stay away from the market for a while.

Irina Manzenko,
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