Yesterday, the euro/dollar pair failed to overcome the resistance level of 1.1890 (the upper line of the Bollinger Bands indicator on the daily chart), despite the general weakening of the US currency. The US dollar index fell to the area of the 91st figure, amid the distressing results of the July Fed meeting, disappointing data on US GDP growth in the second quarter, and an increase in the number of initial applications for unemployment benefits. All these fundamental factors put pressure on the dollar, but did not help EUR/USD buyers overcome an important price barrier, which is the last stronghold at the borders of the 19th figure.
In general, the past week was not in favor of the dollar. The Federal Reserve limited itself to general phrases and formulations, without revealing details about the possible timing of the curtailment of QE. On the one hand, the regulator acknowledged that the US economy has made some progress in the field of the labor market and inflation. On the other hand, according to Jerome Powell, this is still not enough to talk about specific deadlines for curtailing incentives today.
It is obvious that not all members of the Fed agree with his opinion, but we will find out about this a little later, when the minutes of the July meeting will be published. In the meantime, traders are forced to settle for Powell's rhetoric and the text of the accompanying statement. According to the head of the Federal Reserve, the US regulator continues to monitor the situation – the economic consequences of the pandemic are consistently decreasing, but the risks of further prospects still remain, especially in light of the spread of the delta strain of coronavirus. At the same time, the head of the Federal Reserve said that the regulator will warn the markets about the planned changes in advance. Considering the fact that the Central Bank chose not to talk about the timing of the curtailment of QE at the July meeting, the first relevant signals can be announced only at one of the autumn meetings of the Fed. There are also suggestions in the market that Jerome Powell may make a corresponding statement at the economic symposium in Jackson Hole (at the end of August). But in my opinion, these forecasts are too optimistic.
In other words, against the background of record inflation growth and strong Non-farm payrolls, the results of the July meeting were "dovish" and disappointing. The US currency naturally weakened throughout the market, and buyers of EUR/USD overcame the resistance level of 1.1830 (the average line of the Bollinger Bands coinciding with the Tenkan-sen line on the daily chart). Macroeconomic statistics also added fuel to the fire. Yesterday's reports increased the pressure on the already weakened dollar.
Thus, the US GDP in the second quarter of this year increased by 6.5% (on an annualized basis), while most experts expected to see this indicator much higher, at around 8.5%. And although the US economy has officially returned to the indicators that were observed before the outbreak of the coronavirus, traders reacted negatively to the release. The dollar index fell sharply, and for the first time since June 29, it fell to the area of the 91st figure. An additional pressure factor was the weekly data on the US labor market. The indicator of the increase in the number of applications for unemployment benefits jumped to 400 thousand. For the second week in a row, this indicator appears in the "red zone", above the 400-thousand mark.
And yet, despite all the seeming negatives of a fundamental nature, the buyers of the EUR/USD pair did not become the beneficiaries of the current situation. For the development of the northern trend, they had to pass the resistance level of 1.1890, overcoming which would open the way to the area of the 19th figure. But the upward momentum has faded in this price area, which indicates the indecision of the pair's bulls.
The point here is not only in the actual uncorrelation of the positions of the Fed and the ECB. After all, for all its caution and understatement, the Federal Reserve recognizes that the issue of curtailing QE is on the agenda and is among the discussed ones. While the European Central Bank categorically rejects this topic, even without allowing the option of early curtailment of incentives. As for the fate of interest rates, the Fed's median forecast assumes a double increase in 2023. Some members of the US regulator admit a tightening of monetary policy as early as next year. While the ECB, according to the general forecast of analysts, will increase the rate no earlier than 2024 (the option of 2025 is also not excluded). I think additional comments are unnecessary here.
But it is not even the fact of uncorrelation of the regulators' position that exerts background pressure on EUR/USD. The fact is that yesterday's releases, with their more detailed "consideration", do not seem to be a failure. In particular, the growth of real GDP in the second quarter was mainly due to consumer spending. Real personal consumption expenditures (PCE) jumped by almost 12%, exceeding the forecasts of most experts. All key categories of expenses showed a significant (in some cases, a record) increase. The PCE deflator, which acts as an indicator of consumer prices, increased by 6.4% (in annual terms). This is an almost 40-year record: such dynamics have not been observed since 1982. All this indicates a strong increase in consumer spending against the background of limited supply. Americans are actively spending their accumulated funds, thereby accelerating inflation and indirectly exerting pressure on the Fed's "dovish" position.
As for the two-week increase in the number of applications for unemployment benefits, experts point to the current situation in the US automotive industry: many automobile factories closed in early July for technical re-equipment, and this fact caused a temporary increase in layoffs.
Thus, the prevailing fundamental background contributes to a price reversal in the medium term. The resistance level of 1.1890 is still "looming" on the EUR/USD radar (the upper line of the Bollinger Bands indicator on D1). If the buyers of the pair cannot overcome it (and most importantly, gain a foothold above it), we can consider short positions with the first target of 1.1830 (the middle line of the Bollinger Bands coinciding with the Tenkan-sen line) and the main target of 1.1750, which is the key support level corresponding to the lower line of the Bollinger Bands on the same timeframe.