The Fed’s target rate hikes won’t provide such a strong support to the greenback; but it is not sufficient for the EUR/USD steady growth
While the EUR/USD bulls are losing their positions amid the weakest Eurozone PMI data for the past four years, the market is still discussing a possible pause in the Fed’s monetary normalization. Lower prices for stocks and oil, the US weak housing market and growing risks of a decline in the GDP rate and credit stress encourage the FOMC doves to go ahead. On the other hand, less rate hikes in 2019 is only one side of the coin. There is also the euro-area, which doesn’t perform so well.
According to Goldman Sachs, the increase in the federal funds rate by 1.5 bps results in the growth of 10-year Treasury yields by 45 bps, followed by 9% decline in stock prices and 4% strengthening of the U.S. dollar. Since early 2018, amid three monetary restrictions by the Fed (+0.75 pp), the 10-year yield has been up by more than 60 bps; S&P 500 has lost about 1.5%, and the USD rate has been 4% up. If the calculations are correct, the continuous normalizing of the monetary policy won’t result in higher yields or the greenback strengthening. On the contrary, if, amid the current dynamics of the financial conditions, slower GDP rate and inflation growth, the central bank takes a pause, the dollar will be going down.
Dynamics of the US financial conditions
Source: Financial Times.
The same opinion is shared by JP Morgan that expects the EURUSD to continue falling down to 1.1 in the early 2019, followed by the retracement of the pair rates up to 1.18 at the end of 2019.
Unfortunately, as I’ve emphasized many times, the euro can’t take over the falling flag. The scenario to sell the euro from $1.1445 is working out, and it hasn’t managed to move up to the resistance at $1.147 due to the disappointing PMI data. The purchasing managers’ index has been down to the lowest level since 2014; therefore the ECB is rather to sound dovish at the Governing Council’s meeting in December. In addition, the weakness in the German services sector suggests that the domestic demand fails to cover the negative from the export, which is down due to trade wars. The employment problems in France set back the reforms, discussed in Paris.
Purchasing mangers’ indexes in Germany and France
Source: Financial Times
The single European currency hasn’t even been supported by conciliatory comments of Italy’s deputy prime minister Salvini, who suggested that the value of 2.4% not to be ultimate. They can discuss 2.2% or 2.6%, if Italy’s budget provides the necessary economic expansion.
During the last week of autumn, both the euro and the dollar will be challenged. The greenback may lose its shine due to a possible reduction of the second US GDP estimate in the third quarter and the Fed’s hints at a slower monetary normalization cycle in the minutes of the last FOMC meeting. The single European currency will be pressed by the euro-area weak inflation growth in November and the escalation of the US-China trade battle at the G20 summit in Buenos Aires. As long as the EUR/USD rates are below 1.145-1.147, the bears will be dominating.
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Price chart of EURUSD in real time mode
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