EUR/USD clinches new high as eurozone avoids deflation narrowly

EUR/USD clinches new high as eurozone avoids deflation narrowly
  • The EUR/USD pair rose to 1.1130, the highest level since March after Eurostat released preliminary CPI data.
  • The bloc's consumer prices rose by 0.1%, the slowest growth in four years.
  • The data came after Hungary's Orban blasted the distribution mechanism of the recovery fund.

The EUR/USD rose by 0.50 per cent as investors remained optimistic about the eurozone economy. The pair is trading at 1.1130, the highest level since March 30. The euro index, which measures the performance of the euro against a basket of currencies, rose by more than 35 basis points.

EUR/USD rises
EUR/USD rallies after CPI data

EUR/USD rises as eurozone avoids deflation

The eurozone has been hit hard by the coronavirus pandemic. The manufacturing and services PMIs, retail sales, industrial production, and car sales have dropped to unprecedented levels. All this has seen the eurozone economy slide into the deepest recession in modern times.

In a recent statement, the European Central Bank (ECB) warned that the downturn could put a strain on the eurozone. The bank warned about the rising debt levels, especially in some countries like Spain and Italy.

Today, data released by Eurostat showed that the region avoided a deflation narrowly in May. The headline consumer prices dropped by -0.1 per cent after rising by 0.3 per cent in the previous month. The prices rose by a four-year low of 0.1 per cent in the month. The so-called core CPI, which avoids the volatile food and energy prices rose by 0.9 per cent. These figures are all below the ECB target of 2 per cent.

According to Eurostat, the biggest laggard was energy prices, which dropped by 12 per cent in May. It was offset by a 3.3 per cent increase in food, alcohol, and tobacco prices. Services also bounced back from the previous 1.2 per cent to 1.3 per cent.

The worst-affected countries were Slovenia, Luxembourg, Cyprus, and Estonia. On the other hand, the biggest gainers were Netherlands, Slovakia, and Finland.

Earlier on, data from Germany showed that the economy was recovering. In April, the import price index dropped by 1.8 per cent, which was better than the previous decline of 3.5 per cent. Similarly, the country’s retail sales declined at a smaller pace than what analysts were expecting. Also, the French GDP declined by 5.3 per cent in Q1, which was better than the expected 5.8 per cent.

Orban rejects recovery fund

The EUR/USD ignored a statement by Hungarian prime minister, Victor Orban. In a statement, he said that the distribution method proposed by the European Commission was “absurd and perverse.” He said:

“The new distribution system which was presented to us contains an absurd and perverse solution. It would grant more funds to the rich than the poor. So what’s the point of the whole thing?”

In a statement on Wednesday, Ursula von der Leyen unveiled a $826 billion funding plan to help countries deal with the crisis. Under her plan, the biggest beneficiaries will be Italy, Spain, France, and Poland, which will receive €81 billion, €77 billion, €38 billion, and €37 billion, respectively. Other big winners will be Germany, Greece, Romania, and Portugal.

A group of countries christened as “frugal four” have threatened to reject the deal. These countries include Austria, Netherlands, Sweden, and Denmark. These countries reject it because the funds will be in the form of grants. Instead, they want the recipients to pay back the funds over a long period.

According to the commission, the funds will be paid back collectively by the eurozone members through higher taxes. Some of the industries to be targeted will big technology companies like Google and Amazon and heavy industrials that emit significant carbon.

EUR/USD technical outlook

EUR/USD technical analysis

The EUR/USD pair crossed the important resistance level of 1.1068 yesterday and is now heading towards the 61.8% retracement level. The RSI has surged to the highest level since March 10 while the price is also above the 50-day and 100-day EMAs. Therefore, there is a likelihood that the price will continue rising as bulls attempt to test the resistance at 1.1100.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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