The euro has gained ground for a fourth straight day and is up one per cent on the week, an impressive gain. EUR/USD has touched a high of 1.1885 on the day and appears poised to punch into 1.19 territory.
German Preliminary CPI for July overshot the consensus. CPI jumped 3.8% YoY, above the forecast of 3.3% and ahead of the June reading of 2.3%. On a monthly basis, CPI rose 0.9%, beating the estimate of 0.5% and up from 0.4%.
As has been the case in the US and UK, the surge in inflation means that central bank policymakers will have to re-evaluate their monetary policy outlook, as the fear of the economy overheating due to inflationary pressures becomes more real. Inflation is running above the ECB’s new inflation target of 2%. Granted, much of the sharp reading can be attributed to base factors, as Germany lowered VAT rates in July 2020, before raising them again this year. Still, investors reading the headlines see the surge in inflation, and this will lead to expectations that the ECB may have to tighten policy sooner rather than later.
Powell says maybe to a September taper
The FOMC policy meeting was hotly anticipated, but in the end the Fed shied away from any tapering. However, Fed Chair Jerome Powell did state that the economy would need to recover millions of jobs and inflation would need to be durable before the Fed would consider a taper in September. This gives the Fed a couple of months of inflation and employment data to determine if they can start scaling back asset purchases. The takeaway from the FOMC meeting is that the Fed remains dovish and the very earliest we would see a taper is the September meeting.
- EUR/USD has broken through resistance levels as it continues to move higher. The pair is putting pressure on resistance at 1.1893. Above, we find resistance at 1.1986, which is protecting the symbolic 1.20 line
- On the downside, there are support lines at 1.1815 and 1.1737
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