Disappointing US business statistics, falling Treasury yields, and the dovish rhetoric of most Fed officials have made the US dollar lose much of the gains it has made since late April. Investors were actively buying EUR/USD, despite Dallas Fed President Robert Kaplan's announcement that it is better to start cutting stimulus sooner rather than later, and Treasury Secretary Janet Yellen's phrase that the Fed may have to raise rates to keep the economy from overheating. However, the former Fed chairman quickly corrected herself. She respects the independence of the Fed and does not advise the regulator.

Of course, Jerome Powell and his colleagues have reason to continue to convince financial markets of the advisability of adhering to ultra-soft monetary policy. The story of 2013 is still fresh in the memory of investors, when Ben Bernanke provoked a real panic by announcing the withdrawal of QE. The Central Bank does not want to take the same rake, but it is well aware that its passivity contributes to the inflation of bubbles in various markets. The very ones that triggered the recessions in 2001 and 2007. In its financial stability report, the Fed warned that further increases in its already high appetite for risk could lead to a fall in equities that would hit the entire system.

Strong data on the labor market and inflation may force the Fed to change its own outlook. According to Bloomberg experts, consumer prices in April will accelerate to 3.6%. At the same time, Boston Fed President Eric Rosengren, previously stated that any inflation figure that does not start with a two would worry him. The Nordea Markets model, based on the analysis of business activity and other macro indicators, signals that CPI can accelerate to 5%-6%. It is unlikely that in this situation, the Fed will continue to sit on the sidelines.

Dynamics of inflation in the United States and the macroeconomic model

Another risk factor for the EUR/USD bulls is the correction of US stock indices. While they continue to churn out records thanks to strong corporate reporting, US macroeconomic stats, and hopes of congressional approval of new stimulus from President Joe Biden, the market is increasingly looking tired. In addition, May is seasonally not the best month for the S&P 500, and rising real debt rates will increase the risks of a pullback in the stock market.

S&P 500 Forward P/E Dynamics and Expected Real Debt Rates

How can the euro respond? The acceleration of vaccination, falling COVID-19 infections, opening up the economy, and strong statistics. The single European currency has many trump cards. The question is whether it will be able to implement them.

Technically, much of the fate of EUR/USD will depend on the level of 1.2045. If the pair closes above this level after the US labor market report for April, it makes sense to continue buying it with targets at 1.216 and 1.220. On the contrary, closing the day below 1.2045 will increase the risks of quotes returning to 38.2% and 50% of the CD wave of the Shark pattern. They correspond to the levels of 1.198 and 1.193.

EUR/USD, Daily chart