The euro continues to make inroads against the US dollar. In the European American session, EUR/USD is trading at 1.2255, up 0.34% on the day. The euro has touched a daily high of 1.2262, its highest level since January 4.
A holiday on Monday didn’t stop the euro from gaining ground and the upward trend has continued on Tuesday. Investors were pleased, as the German Ifo Business Confidence Index for May outperformed. The reading came in at 99.2, up from 96.8 and above the estimate of 98.2. A key factor in the strong figure was very high expectations for tourism this summer, as Covid numbers are receding. The index has now accelerated over four straight months, as confidence in the business sector continues to rise.
A weak GDP report for Q1 out of Germany has not had any negative fallout on the strong euro. Germany’s economy came in at -3.2% (YoY) and -1.8% (MoM). The resurgence of Covid-19 in the first quarter of Q1 hampered economic growth, and with the fourth-quarter GDP also in negative territory, the German economy is technically in decline. However, despite the dour GDP report, the mood appears to be one of optimism, as the vaccine rollout has resulted in a sharp drop in Covid cases in the past week and some German states are easing health restrictions.
The Federal Reserve continues to stick to its message that its ultra-accommodative policy will continue and that will maintain current QE levels. Inflation surged in April, which led to speculation that the Fed might contemplate scaling back QE. This gave the US dollar a brief boost earlier in May, but the market appears to have accepted the Fed line that higher inflation is transitory and any tightening of policy is a while off. This has put pressure on the US dollar, with the euro and other major currencies continuing to rally.
- EUR/USD is testing resistance at 1.2242. Above, there is resistance at 1.2303
- On the downside, there is support at 1.2123, followed by 1.2065
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