EUR/USD: euro grows steadily, greenback likely to remain weak

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Yesterday, the US stock market closed in the red, losing its early gains.

Concerns about inflation have somewhat subsided largely thanks to the reassuring statements of the Fed representatives.

More and more investors are inclined to believe that the surge in consumer prices will be temporary. They agree that that the United States has probably reached the fastest pace of economic recovery and in the future, it will slow down.

Data released yesterday showed that new home sales in the country in April decreased by 5.9%, to 863,000 compared with the previous month.

In addition, The Conference Board Consumer Confidence Index sank to 117.2 in May from 117.5 in April.

Some investors still fear that the acceleration in consumer prices in the United States, along with the improvement in the labor market and the economy as a whole, may force the Fed to start reducing its bond-buying program earlier than expected.

Vice-Chair Richard Clarida also hinted about the Fed doing less - at some point. "It may well be...there will come a time in upcoming meetings we will be at the point where we can begin to discuss scaling back the pace of asset purchases," Clarida said on Yahoo Finance. "That was not the focus of the April meeting. It is going to depend on the flow of data." Fed policymakers have promised to give investors plenty of notice before changing policy.

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According to the consensus forecast of experts polled recently by Reuters, the S&P 500 index will be only about 2.5% higher than its current level by the end of the year as concerns about increasing inflation risks are likely to weigh on the US stock market this year.

On Monday, the S&P 500 index rose to a two-week high and surpassed the level of 4,200. However, last week, the index was stuck in the 200-point range, where it lost almost all the bullish potential.

The volume of trading on the US stock market fell to the lowest values since the beginning of the year, which may indicate investors ' uncertainty about the future, according to Bloomberg strategists.

Forex is showing a similar dynamic.

On Tuesday, the greenback approached four-month lows around 89.50. Then, it somehow held its downward movement.

Meanwhile, the euro/dollar pair reached its highest level since the beginning of January near 1.2265, but then slightly corrected.

Comments from Fed Vice Chairman Richard Clarida gave a boost for the US dollar.

Germany unveiled positive economic data. However, it did not push the euro higher. On the contrary, traders locked in profits on EUR/USD.

The IFO Business Climate Index jumped to 99.2 in May from 96.6 in April, notching the highest value since May 2019.

According to Klaus Wohlrabe, an economist at the IFO Institute, the German economy may expand by 2.6% in the second quarter compared to the first quarter.

The greenback managed to gain momentum and push off from the recent lows. On Wednesday, it was growing correctively against its main competitors after declining during the previous two trading sessions. The US dollar index was trading with an increase of more than 0.2% around 89.80.

However, the bearish outlook for the US dollar index is still maintained. So, it may decline deeper in the short term.

The US dollar should remain weak as Fed officials assure that a rise in inflation will be temporary and it gives markets no reason to expect any changes in policy. The economic recovery outside the US is likely to have an even stronger impact on the US currency, economists at ING said.

On Wednesday, the EUR/USD pair continued to retreat from four-month highs.

However, the bulls are still determined to send the pair above the current values.

Traders may open long deals after locking in profits.

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The epidemiological situation in Europe is improving. Obviously, the vaccination campaign against COVID-19 is bearing fruit. In the EU, almost 40% of the population has already been vaccinated (at least with the first dose of the vaccine).

The prospects for the recovery of the eurozone are brightening up. Hence, investors are excepting the ECB to discuss the reduction in the QE program at the next ECB meeting, which will be held on June 10, experts at Rabobank said.

"The EUR/USD pair may advance before the ECB meeting. However, if its results are disappointing, the euro is likely to lose momentum, especially ahead of the Fed meeting on June 16, they added.

At the beginning of this week, the main catalyst for the growth of the pair was the statements of Fed officials. On Thursday, Luis de Guindos, Jens Weidmann, and Isabel Schnabel will deliver speeches,

ECB policymakers' concerns about the appreciation of the single currency may spook bulls.

As for the economic data, investors are awaiting the publication of the personal consumption expenditure price index (PCEPI) for April which is due on Friday. The index is one measure of US inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy. If it turns out that this indicator did not grow as much as the consumer price index last month, market participants' fears about inflation will abate. So, the Fed is unlikely to reduce the quantitative easing program. This will support riskier assets, pushing lower the greenback.

The EUR / USD pair faced strong resistance level in the area of 1.2265-1.2270.

The breakout of this level will allow the pair to hit 1.2300 and then to climb to the highs of the current year in the area of 1.2350.

The outlook for EUR/USD will remain bullish as long as it is trading above 1.2160. Near this level the short-term support line from the March lows passes.

The material has been provided by InstaForex Company - www.instaforex.com

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