EUR/USD: Euro’s False Start
LiteForex | Sep 25, 2018 10:35AM ET
Before the announcement of the results of the Fed meeting, investors are in no hurry to open medium-term positions in the EUR/USD
The EUR/USD bulls tried to resume the attacks and re-tested the psychologically important mark of 1.18 against the background of moderately hawkish comments by Mario Draghi. However, everything quickly fell into place, and the main currency pair returned to its original positions. Investors are well aware that the supply is on the side of the Fed. Prior to the updated forecasts of the Federal Reserve and Jerome Powell's speech, no one wants to get into trouble, which increases the risks of short-term consolidation of the euro in the range of 1,165-1,185.
Looking at how often representatives of the European Central Bank do not hesitate to talk about the normalization of monetary policy, there is a feeling that they are quite satisfied with the current levels of the EUR/USD. Member of the Governing Council, and concurrently one of the main contenders for the post of ECB head Benoit Coeuré and chief economist Peter Praet argue that the markets should pay attention to the speed of the monetary restriction, and not its terms. Head of the Bank of Austria Ewald Nowotny states that the eurozone economy is strong, and it is necessary to raise rates earlier than investors currently expect. Finally, retiring Mario Draghi suggested that under the influence of a strong labor market and the acceleration of wages, core inflation in 2020 could grow to 1.8% (the ECB forecast is 1.7%).
Dynamics Of European inflation
Source: Bloomberg
It is obvious that the shift in the timing of the ECB's rate hikes to an earlier period than September 2019 will become a serious bullish euro driver, but one should also take into account the dollar's trumps. According to the median forecast of Bloomberg experts, the Fed will continue to tighten monetary policy once a quarter until June of next year, after which it will take a pause in September. The federal funds rate will reach 3% by the summer of 2019, although the previous poll had a figure of 2.75%. If we take this scenario as a basic one, then the strengthening of the trade conflict, the fading of the fiscal stimulus effect and the proximity of the rate to neutral levels may slow down the normalization and, against the background of its start in the euro area, will help the EUR/USD advance in the direction of 1.25.
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Dynamics Of Federal Funds Rate
Source: Bloomberg
Curiously, Deutsche Bank (DE:DBKGn) believes that the euro will become the main beneficiary of the trade war and will grow to $ 1.2 in the near future on the background of the substitution of Chinese imports to the US by the European imports. In any case, the escalation of the conflict has not given any support to the dollar yet. The states are trying to conduct military operations on several fronts: after Canada and China, Washington began to exert pressure on Japan, threatening with duties on the supply of cars. Wells Fargo (NYSE:WFC) notes that such drivers of the USD index growth as a divergence in monetary policy and in economic growth have exhausted themselves, but the development of the policy of protectionism by Donald Trump increases the risks of currency wars, and the US administration will clearly play down.
Thus, the medium- and long-term outlook for the greenback is by no means optimistic, but if the Fed wants to support it on the short-term horizon, we will find out very soon.
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