- The US Federal Reserve disappointed the markets by not showing any desire to tighten monetary policy.
- The US economy is expected to add about 1 million jobs in July.
- The EUR/USD pair has recovered well, but the exchange rate change has not yet been confirmed.
On the last trading day of the month, the EUR/USD pair reached new July highs, stopping just below the level of 1.1900. The pair has been growing since the beginning of the week, but gained momentum on Wednesday after the US Federal Reserve brought down the dollar.
This is not the time to tighten up
The US central bank, as expected, left its monetary policy unchanged. At the same time, he noted that the economy continues to develop, although "significant further progress" in achieving the Fed's goal of stabilizing prices and maximum employment has not yet been achieved. "We haven't achieved that yet," Chairman Jerome Powell said in response to questions after his speech. Market participants were hoping to get some clues about how and when the US central bank will begin to reduce its bond-buying programs launched to support the economy during the pandemic.
The Fed has actually created permanent repo mechanisms so that banks can exchange bonds for cash. Powell announced that they will prepare both domestic and international lending schemes. "These mechanisms in the financial markets will help support the effective implementation of monetary policy and the smooth functioning of the market," the statement said.
The US currency fell after Powell's speech, as stocks rose. US indices held near record highs, as the US central bank is in no hurry to reduce financial support.
The growth of the American economy has reached a plateau
Weaker-than-expected US macroeconomic data compounded the dollar's weakness. The preliminary estimate of the gross domestic product for the second quarter showed that the economy grew at an annualized rate of 6.5%, which is lower than the expected 8.5%. GDP for the 1st quarter was revised downward to 6.3%. Orders for durable goods rose by a modest 0.8% in June, compared with the expected 2.1%, and the base indicator was 0.3%. The number of initial applications for unemployment benefits for the week ended July 23 amounted to 400 thousand, and the indicator for the previous week was revised upwards to 424 thousand. The US economic recovery has reached a plateau. The macroeconomic data confirmed this, the Fed had expected such a state in advance.
At the same time, the EU economy is in the process of recovery. Germany has published preliminary data on July inflation: the consumer price index increased by 3.8% year-on-year. Growth in the country was moderate, as GDP in the second quarter was 1.5%, below the expected 2%. In the European Union as a whole, GDP for the same period increased from -0.3% in the first quarter to 2% on a quarterly basis. In addition, the unemployment rate in the EU fell to 7.7% in June from 8% a month earlier. Finally, the indicator of economic sentiment in the EU improved to 119.0 in July, exceeding the expected 118.5.
The number of new cases of coronavirus infection in Europe and the United States is growing due to the rapid spread of the Delta strain. Vaccination has slowed down in the US, but the pace remains in the EU. Both there and there, about 50% of the population has been vaccinated with at least two doses. If the situation persists, the economic recovery will be under threat on both sides of the Atlantic.
What's next in the economic calendar
The upcoming week will be busy, with an emphasis on US employment data. On Wednesday, the ADP survey on job creation in the private sector will be published in the United States, projected at the level of 600 thousand. On Thursday, figures on weekly applications for unemployment benefits and the number of jobs will be published ahead of the release of the report on the number of jobs in the non-agricultural sector on Friday. At the moment, analysts predict that 926 thousand new jobs were created in July. The monthly employment report can change the rules of the game if the number exceeds the threshold of 1 million.
In addition to employment data, the official July ISM indices for manufacturing and services will also be released in America, and Markit will publish the final figures of the business activity index (PMI) for July.
In Germany, data on retail sales for June will be released on Monday, for the European Union they will be released on Wednesday. Markit's Business Activity Indices (PMI) for July will be published on Monday and Wednesday. By the end of the week, Germany will publish figures on production orders for June and industrial production for the same period.
EUR/USD forecast
Technically, a weekly recovery seems like a normal correction from a broader point of view. The pair continues to develop below the 61.8% pullback from the March-May rally, which is at the level of 1.1920. On the weekly chart, the 20-day simple moving average retains its bearish bias of about 50% of the pullback of the same rally, which is at 1.1985. Technical indicators remain inside negative levels, and momentum modestly recovers while the RSI is flat.
On the daily chart, the pair shows a moderate positive picture, as it is growing above the flat 20-day simple moving average, currently providing dynamic support around 1.1820. Longer moving averages remain undirected near the 1.2000 zone, and technical indicators have recovered, although they have lost momentum near their midlines.
In the near future, the already mentioned Fibonacci levels at 1.1920 and 1.1985 are the resistance levels. Support levels are at 1.1840, the minimum of the month at 1.1751 and, finally, at 1.1703, the minimum of March.