The EUR/USD broke out higher after the German business expectations jumped suddenly in May and as the US dollar weakened. It rose to a high of 1.2258, the highest level since January this year.
German expectations rise
The German economy contracted at a faster rate than expected in the first quarter. According to Destatis, the country’s economy contracted by 1.8% in the first quarter after expanding by 0.3% in the fourth quarter of 2020. This decline was lower than the median estimate of 1.7%. As a result, it declined by 3.4% on a year-on-year basis.
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According to Destatis, the contraction was mostly because of the lockdowns the government implemented to curb the new wave of the pandemic. This led to weak household consumption, which dropped by 5.4%. Similarly, government investments and exports also declined in the first quarter.
However, there is a possibility that the economy will rebound in the second quarter since the country has started to reopen. The government has also ramped up the coronavirus vaccine rollout. Indeed, business expectation has started to do well. According to the ifo Institute, business expectations increased from 99.2 to 102.90 in May. This was better than the median estimate of 101.4.
In the same period, the current assessment increased from 94.2 to 95.7 while the business climate improved from 96.6 to 99.2. The two were better than the expected 95.5 and 98.2.
The EUR/USD pair also rose because of the weak US dollar. The dollar index dropped by more than 0.20% as inflation fears eased. The currency also declined against most emerging market currencies like the Chinese yuan and South African rand. Later today, it will react mildly to the latest US new home sales data.
The EUR/USD broke out above the important resistance at 1.2242. On the four-hour chart, the pair is still above the 25-day and 50-day exponential moving averages while the Relative Strength Index (RSI) has moved above 68. The pair is also slightly above the Ichimoku cloud. Further, it is above the important ascending trendline that connects the lowest levels this month.
However, the pair seems to be forming a rising wedge, which is usually a bearish signal. Therefore, in the near term, the bullish trend will likely continue but there are risks of further weakness.
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