The European currency sank against the US dollar. The ZEW data slightly surprised traders. However, the drawdown in German industrial production, which became the main catalyst for the euro's fall in the first half of the day, is not at all.
But before we talk about fundamentals, I would like to say a few words that the European Central Bank is starting to act exactly like the US Federal Reserve, following its path and taking an example from it. Now the European regulator needs to maintain ultra-soft monetary stimulus. Such a decision will be made at the meeting of the bank, which will be held this Thursday. The policy will remain unchanged because of the risk of slower economic recovery after the pandemic. Today's data from ZEW has already proved this to us.
The fact that the eurozone economy lags far behind the United States also allows us to take a wait-and-see position and not rush too much to change decisions at the first signs of a revival of inflationary pressure. One of the reasons why European countries are lagging behind the United States is the fact of later vaccination and the lack of the necessary amount of vaccine. The vaccination targets are still at least a few months away, and new strains of the virus are already threatening to restrict freedom of movement during the summer.
Even German politicians, who are set on aggressive changes in the ECB's policy, are not in a hurry to declare such a need in the future. In a recent interview, Bundesbank President Jens Weidmann noted that changes in the bond-buying program are necessary. However, at the moment, it is better to wait for new economic indicators. ECB President Christine Lagarde also insists that the ECB needs to maintain favorable financing conditions during the economic recovery.
Inflation in the US may rise in the near future to 4.7%. However, according to the latest data, inflation in the eurozone is about 2%, slightly higher than the ECB's target level. Therefore, it is still quite far from making changes to the central bank's policy. Many investors and economists do not expect any major central banks to reduce their bond purchases until September of this year. Interest rates are also not expected to rise until at least 2023.
As for the fundamental statistics, as noted earlier, German industrial production data in April this year put pressure on the euro in the first half of the day. The indicator fell much more than the economists' forecast. Destatis said industrial production fell 1% month-on-month in April, after rising 2.2% in March. Economists had forecast growth of 0.5%. On an annualized basis, industrial production rose to 26.4% from 4.8% in the previous month. Excluding energy and construction, production fell by 0.7%.
Data on economic sentiment in Germany also surprised traders, as indicators unexpectedly weakened in June for almost all indicators. The growth was only an indicator of the assessment of the current situation. A study by the ZEW-Leibniz Center for European Economic Research says: the ZEW indicator of economic sentiment fell to 79.8 points in June from 84.4 points in the previous month. Economists, on the contrary, predicted growth to 86.0 points. Meanwhile, the current economic situation assessment improved significantly in June: the index rose to -9.1 points from -40.1 points a month ago. The decline is mainly due to a much more accurate assessment of the economic situation, which has now returned to its pre-crisis level, ZEW noted.
As for the similar indicators for the eurozone, the ZEW Institute's index of business sentiment also fell by 2.7 points to 81.3 points in June. The indicator of the current economic situation increased by 27.0 points to -24.4 points.
A report on the eurozone economy, which contracted less than previously estimated in the first quarter, helped a more significant drop in the European currency. Although this indicator is not of serious interest to investors right now, according to Eurostat, the gross domestic product fell by 0.3% in the first quarter after falling by 0.6% in the fourth quarter. The decline for the first quarter was revised down from a preliminary reading of -0.6%. On an annualized basis, GDP declined 1.3%, compared with a 4.7% drop in the previous quarter. Household spending fell 2.3%, while government spending remained unchanged in the first quarter. Exports increased by 1%, while imports increased by 0.9%. For traders and investors, a much more important assessment now is the recovery of the European economy in the 2nd quarter of this year, which is a double recession.
The Italian retail sales data did not worry traders much. However, it is impossible not to mention this report. For the first time in three months, sales declined in April due to a drop in non-food sales. A report from statistics bureau Istat said sales fell 0.4% month-on-month after being flat in March. Year-on-year sales growth accelerated to 30.4% from 23.5% in the previous month.
As for the technical picture of the EURUSD pair, the immediate target of buyers remains the resistance at the base of the 22nd figure. Going beyond this range will lead to a new wave of growth of the trading instrument with the update of the highs of 1.2225 and 1.2250. It will be possible to say that the pressure on the pair has returned after the bears break below the support of 1.2155. In this case, we can expect a more significant downward correction already in the minimum of 1.2210. Further support is seen in the area of 1.2070.
As for the British pound, the pressure on the pair shifted from the Asian session to the European one. The rapid spread of the new variant of COVID-19 in the UK has raised concerns about the full opening of the economy on June 21. The so-called Delta variant, first discovered in India, is about 40% more contagious than the British coronavirus strain. UK Health Secretary Matt Hancock said it was too early to tell whether the government would be able to stick to a timetable for fully opening up the economy and reopening all businesses and institutions.
If we talk about the technical picture of GBPUSD, sellers will focus on breaking through the support of 1.4125. If this is done, the pound will most likely fall to a low of 1.4085 and then test a further local low in the area of 1.4040. We can only talk about the recovery of the trading instrument after it goes beyond the large resistance of 1.4190, which will open a direct path to the local maximum of 1.4240, which is also the upper limit of the side channel, in which the pair has been for quite a long time.
