At the end of last week, the Euro/Dollar (EUR/USD) exchange rate fell back to the support of 1.1900.
U.S. inflation data on Friday showed stronger-than-expected numbers. The producer price index has reached its highest level in recent years. Wells Fargo analysts note that the increase in the indicator in March is a key sign of steadily growing inflation. Given the supply chain bottlenecks, the Fed is likely to keep monetary policy unchanged and watch for a sustained recovery in 2021. The bank expects to see a further increase in inflation to the levels of last year, although it is possible that the strengthening will be temporary. As initial activity in the service sector slows, Wells Fargo expects to see a slowdown in monthly price growth and a drop in annual inflation growth by mid-2022.
In the first quarter, the Euro declined against the Dollar by about 4%. Investors have reduced their deposits in the EUR amid fears of economic recovery in the Euro zone. While the ECB will maintain its stance on soft monetary policy, the situation in the US looks more uncertain on this issue. The agreement on the EU bailout fund was a truly breakthrough decision, but the failure to implement it and to actually pay out the funds remains a cause for concern. The acceleration of vaccination rates in the coming weeks will add to the positive side of the Euro Zone's fairly strong leading indicators. The Euro will continue to struggle against the strong Dollar in the short term, but a moderate recovery is expected in the second half of the year, as the dynamics of economic growth will become more active.
Trading signal
In my forecast, I expect the Euro/Dollar to decline to 1.1825.