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Strong PMI growth in the US and the EU will require adjusting stimulus plans. Markets are waiting for new data. Overview

The opening of borders and the gradual lifting of COVID-19 restrictions have led to the fact that the service sector on both sides of the Atlantic is starting to rapidly increase. The US PMI indices are at record levels, while the Eurozone PMI is at the highest since 2018.

The Euro area's index grew to 55.1 against 50.5 a month earlier, while production also remained at a high level – 62.8 against the forecast of 62.5. A similar picture is observed in the UK: the PMI in the services sector rose to 61.8, slightly below the consensus forecast of 62.2. As for the United States, the PMI in the services sector rose to 70.1 against 64.7 earlier. The composite index reached 68.1 points.

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The rapid growth of the PMI indicates a high rate of economic recovery, which, in turn, may require adjusting the stimulus plans. The Biden administration reduced the amount of the previously proposed infrastructure package from $ 2.3 billion to $ 1.7 billion, but Republicans and Democratic Senator Mnuchin continue to consider it too high, and also see no reason to raise the corporate tax to finance it. If the Biden plan fails, it will be a strong bullish factor for the US dollar.

CTFC data for the week to Tuesday (May 18) showed a slight increase in total short positions on the US dollar by $ 33 million for five consecutive weeks. The net short position is currently -15.4 billion, which is the largest bearish rate since March.

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Although the bearish position has slightly increased over the week, the US dollar still looks weak and there are still few reasons to hope for a close bullish reversal. It is necessary for more data. The April durable goods orders report will be released this week, as well as personal spending and income data, which will help adjust inflation expectations.

EUR/USD

The ECB President, Ms. Lagarde contributed to the sales of the Euro currency on Friday. When asked if the ECB could cut its bond purchases in response to an improved economic outlook, Lagarde replied that "it is too early and there is really no need to discuss longer-term issues." Traders expectedly concluded that the ECB does not intend to reduce asset purchases even in the face of rapid growth, which has played a negative role for the euro and will limit its growth, at least until the positions of the Fed and the ECB become more specific.

The net long position of the euro rose by 996 million to 14.356 billion. This is about half of the maximum value of August last year, but the recent dynamics are clearly bullish, and the recovery of the long position is very active.

The settlement price is close to the spot price and it is inclined above. There is an upward trend. The US dollar remains under pressure.

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The euro should consolidate above the level of 1.22. The downward correction at the end of the week can be used for purchases. The target is set at 1.2350. This is quite an important level, since it represents the middle of the ascending channel in addition to the local high. The euro will strive for 1.2520/50 in the near future.

GBP/USD

As for the British pound, an important factor for assessing its future prospects is the possible postponement of the opening date of the economy due to the rapid spread of the Indian COVID strain. Last Friday, Johnson said that he sees no obstacles in order to meet the previously announced deadlines, since the latest data show that the existing vaccines are quite effective against the Indian strain. This factor could be bearish for the pound if the situation with vaccines is less positive, but so far, it seems that there is nothing to worry about.

The pound slowed down its growth. The net long position declined by 282 million, reporting to 2.208 billion over the reporting week, but the pound's advantage over the dollar is still noticeable. The target price is above the average and directed upwards, so the further growth of the pound is more likely.

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The pound failed to move above the high of 1.4224 on the first attempt, but the second one is almost inevitable. There are high chances that the resistance level will be broken through successfully. After its breakdown, the target will be the 3-year high located at 1.4375.

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