EUR/USD parity is moving again towards the high end of its fluctuation range

The EUR/USD parity is moving again towards the high end of its fluctuation range this year. After hitting a high of 1.1704 against the single currency at the end of March, the dollar continue to decline, trading at $1.2200 to the euro this morning. The main topic in recent days has once again been US inflation. Even though inflation was expected to rise, it grew faster than expected in April. Consumer prices jumped from 0.8% to 4.2% year on year. Inflation excluding food and energy prices increased from 0.9% to 3.0% over one year, the highest since 1996. And yet the Fed seems unfazed by this rate, which is now well above the 2% target, and has endeavoured to reassure the markets. Vice Chairman Richard Clarida said the institution was still anticipating higher inflation – temporary rather than long lasting – like this acceleration in April which took the markets by surprise. The Federal Reserve, which has therefore reiterated the transitory nature of this upward pressure on prices, should maintain its expansionary policy until full employment returns, as it has mentioned on numerous occasions. Having dropped sharply in response to the news, the main stock market indices rebounded at the end of the week. Similarly, the yield on the 10-year US Treasury note, which had approached 1.70% after the announcement, has since fallen. And paradoxically, while a potential rate hike should benefit the dollar, the US currency has lost ground because Americans still live in the age of easy money, which is conducive to risk taking. There are, however, voices of dissent from the Fed’s reassuring discourse. There is, for example, Larry Summers, the former Director of the National Economic Council of the United States who has been most critical of the Fed’s wait-and-see position. For him, inflation is rising faster than expected and employment figures do not actually reflect the real situation in the country. The reopening of the economy is allowing the sectors most affected by the pandemic to regain leeway to raise prices, especially as household finances have improved thanks to the recovery in employment and government stimulus plans. The airfares went up by 10% in April, followed by hotel and car rental prices.

On the other side of the Atlantic, the ZEW Indicator of Economic Sentiment in Germany showed a strong resurgence of optimism in May with a stronger-than-expected rebound in the index, which went from 70.7 to 84.4 points. There is a similar trend in the eurozone with a sharp rebound in the economic outlook, which went from 66.3 to 84.0 points. These two surveys corroborate the scenario of an upturn in economic activity in the eurozone, which should accelerate in the second half of the year thanks to the progress of vaccination campaigns and the gradual reopening of the economies. These positive data also lifted the euro, to the detriment of the US currency.

The greenback has also lost ground against the pound sterling, which is very close to its year’s high at the end of February.  The Swiss franc and gold also reversed their downward trend with respect to the dollar to advance towards the highs reached in early January.

China has seen a slowdown in economic growth despite positive figures. Thus, industrial production only grew 9.8% in April on an annual basis against 14.1% previously. Retail sales rose only 17.7% against 34.2% in March. These figures, although still impressive and envied by many Western economies, are nevertheless raising fears of a slight slowdown. Despite this, with the general decline in the greenback, the Chinese yuan rose to 6.4250 per dollar against 6.49 at the start of the month Moreover, Chinese investors’ appetite for US Treasuries remains thanks to rising yields. These investors purchased $41.56 billion worth of Treasury securities, the largest amount in eight years. The previous record dated from January 2013.

The upcoming agenda is very light as central bank meetings will not resume until next month. But in the meantime, this evening, the Fed will publish the minutes of its last meeting. With the recent publications of employment and inflation figures and even though this meeting took place before the release of these unexpected data, it will be interesting to see how the bank sees the evolution of the US economy.