2019-12-20 2018-06-21 Euro Stoops to Interventions 21.06.2018 Dmitri Demidenko 2019-12-202018-06-21

ECB sees a potential for EUR/USD decline

Doesn’t matter how much the ECB blames bad weather, strikes, a flu epidemic and trade wars for the decline in the Eurozone GDP in the first quarter, it perfectly understands that it couldn’t do without quitting the monetary stimulus and 14% euro revaluing against the US dollar in 2017. The Governing Council’s members apparently liked the EUR/USD respond to its meeting’s results in June, so they decided to fuel the situation. Mario Draghi noted that the interest rate could stay at the current level for even longer, and his plans to quit QE in 2018 could be changed. Ewald Nowotny went even further. He stooped to verbal interventions.

According to the Governor of Austria’s central bank, the market situation suggests that euro value against the dollar should be much lower. The Fed is raising the interest rate, the ECB is willing to hold it the same until at least September. Divergence in monetary policies presses the EUR/USD quotes down. The markets responded immediately, but calmed down soon after. In fact, they had known about it before. On the other hand, if the Governing Council’s representative speaks about it out loud, things are really going wrong. Societe Generale is looking forward to break out of the psychologically important level at 1.15 and notes that trade wars, by means of inflation growth and the Fed’s aggressive monetary restrictions, are a bullish factor for the greenback. Euro bulls have to defend their positions and lower their projections. For example, USB expects euro to be at $1.3 in 2018, rather than at $1.25

I, personally, think, it is neither divergence in monetary policies, nor trade wars, that generates major investment ideas in Forex. It is clear from the leading dynamics of the trade-weighted USD index. It is rising against the developed countries faster than against the developing ones. It is OECD that the most clearly features the difference between the Fed’s interest rate and that of the other central banks.

Dynamics of the trade-weighted USD index

Source: Wall Street Journal

As for trade conflicts, until the import tariffs are more significant, the markets will hardly respond strongly. Another matter is if the conflict develops into a full-scale trade war. The EU confirmed the tariffs on the US imports worth €2.8 bn, coming into effect on June 22; while Germany is trying to find a compromise. To avoid imposing 25% tariffs on car imports from Europe into the USA, Germany‘s administration offers to cancel the existing duties (10% in the EU, and 2.5% in the USA). Maybe, Donald Trump should go that way?

EUR/USD does not necessarily develop consolidation, although there are no somehow important events in the economic calendar. There can well be a technical puncture through the supports at 1.153 and 1.151 that may trigger a new wave of sales. Anyway, as long as euro is trading below $1.1645, the market sentiment is bearish.





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