The EUR/USD pair broke out on Tuesday as market sentiment improved as fears of high-interest rates declined. The pair rose to 1.2220, which is the highest level since February 26.
Federal Reserve and interest rates
The EUR/USD retreated last week after the relatively upbeat economic data from the United States. The data showed that the consumer and producer price index (PPI) rose at the fastest pace in more than a decade. This sent shivers that the Federal Reserve would respond by tapering asset purchases and hiking interest rates.
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After the data, some respected analysts made the case that the Fed should start tightening. They also cited the tightening labour market and the robust government spending. Indeed, the Federal government is expected to spend more than $1 trillion in infrastructure spending.
In an interview with CNBC, Rick Rieder, of Blackrock asked the Fed to start tightening. The same sentiment were repeated by Mark Wilson of Morgan Stanley and Mohammed El Erian.
However, in an interview, Atlanta Fed’s Raphael Bostic said that now was not the time to tighten, citing the uneven nature of the ongoing recovery. The dollar index has declined by more than 0.40% today.
The EUR/USD pair also rose as investors ignored the latest EU GDP data. The second estimate of GDP was in line with what Eurostat published in April. The data showed that the economy contracted by 0.6% in the first quarter, leading to an annualized contraction of 1.8%. The decline was in line with what analysts were expecting. Still, analysts expect that the economy will recover as the EU government ramp up their vaccination drive.
Looking ahead, the EUR/USD will next react to the latest US housing starts and building permits numbers. It will also react to the upcoming EU CPI data that will come out tomorrow.
The four-hour chart shows that the EUR/USD pair moved above the important resistance at 1.2182, which was the highest level on May 11. The pair was also forming an ascending triangle pattern. It has also moved above the 25-day and 15-day exponential moving averages (EMA) while the MACD has also rallied. Therefore, the pair will likely keep rising after today’s bullish breakout.