EURUSD bears were not discouraged by dovish rhetoric of the Fed November meeting minutes

Disappointing statistics on the US inflation and moderate dovish rhetoric of the Fed November meeting minutes became the further evidence of the slower normalizing of the Fed monetary policy. However, investors didn’t rush to sell the dollar. The strength of the US economy, weakness of other countries and strong demand for the greenback as a safe-heaven asset amid trade wars set the EURUSD bulls back.

The Federal Reserve starts suggesting a potential slowdown in the monetary normalization process. In November, the policy makers were discussing a potential change of the course for a gradual increase of the interest rate that is “very dependent” on the incoming data. The central bank is likely to be willing to make a pause in the interest rate hiking. It is clear from the FOMC emphasis on tighter financial conditions, global risks and the signs of a slowdown in the economy sectors, responsive to the rate changes. However, the dependence of the Fed decisions on the incoming date doesn’t mean that they are giving up on the monetary restrictions. They need signals form economy, and the signals are controversial.

Despite the fastest increase of the consumer expenditures for the past seven months (+0.6% MoM), the US core inflation in October (PCE, +1.8% YoY) is below Bloomberg forecast (+1.9%). The index is down from the 2% target. May it be the reason to slow down monetary normalization? On the other hand, the leading growth of the consumer expenditures over the inflation rate is a positive signal for the GDP. The US economy can well go on expanding at the same pace.

Dynamics of the US inflation and consumer expenditures

Source: Wall Street Journal

Investors wonder, whether they should right now buy the euro to the US dollar, losing its advantages. The ECB, in its Financial Stability Review, defines four key risks: investors’ willingness to get rid of income assets; Italy’s debt sustainability; dampened bank profitability that hampers banks’ intermediation capacity; and, finally, liquidity shortage in the investment sector. This approach suggests that the central bank hesitates whether it should end its ultra-easy monetary policy or not. Additional pressure is put on the euro by a drop in the Euro-area economic and consumer confidence that has been down for 11 consecutive months, and a slowdown in the German inflation rate to 2.3% in November, compared to the previous 2.5%.

Dynamic of European economic and consumer confidence

Source: Bloomberg

Investors are now focused on the meeting of Donald Trump and Xi Jinping at the G20 summit in Buenos Aires. The US president said earlier that he might strike a deal with China, but he liked “the deal we have now", as he liked those billions of dollars coming to the U.S. form China as import tariffs. If the country leaders reach a compromise at the beginning of December, there will be detailed negotiations between the U.S. and the Chinese officials in the mid-December. It will increase the chances for the US-China conflict easing and press the U.S. dollar down. Anyway, unless the resistances at 1.1445 and 1.147 are tested, the EURUSD rate will hardly go up.


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Dollar bares its teeth

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