Concerns about a pause in the Fed’s monetary normalization and a slowdown in the U.S. GDP rate draw EUR/USD up
And why worry about a speck in your friend's eye when you have a log in your own? If Donald Trump wants the Fed to suspend normalizing it monetary policy, in order to weaken the dollar, he must refrain from the protectionism. The U.S. economic sanctions and import tariffs support the growing demand for the US dollar. According to the Bank for International Settlements, US dollar credit to non-bank borrowers outside the United States rose to $11.5 trillion. US dollar credit to emerging market economies is up to $3.7 trillion, from $1.5 trillion ten years ago. Up to 80 per cent of international trade is financed by US dollar credit or credit insurance. If the USA blocks the access to them by means of economic sanctions, it will be a real disaster.
To charge the Fed alone with dollar revaluation is foolish at best. To support the charges with reference to the U.S. flattening yield curve from 50 bps in early 2018 down to the current 20 bps is superficial. 2 Year Treasury rate is growing much faster than 10-year Treasury yield, because the bond quotes mostly include the chances of four monetary restrictions in the next 12 months. But investors are not confident in the long-term outlook of the US economy. The tax reform, according to the Fed, will provide only a temporary effect. It is now supporting the expanding gap between the US and European GDP growth, making it the widest since 2014, and sending EURUSD down.
So, the USD uptrend results from three fundamental reasons: The Fed’s monetary normalization; the US strong economy; and the protectionism. And investors start to doubt that the first two will go on working. Donald Trump, by his comments, has increased the risks of foreign exchange interventions and a slower pace of the federal funds rate increasing; although, according to Credit Suisse, the influence of Donald Trump’s tweets on the market has only a short-term effect. Dollar is going down during a trading day or a week, but then it is going up and closes the months in the green zone.
Dollar impact of verbal interventions by Donald Trump
Source: Financial Times
Markets are now being ruled by the Fear. Speculator worry that the Fed will deviate from its plan, the White House will increase its forex interventions, and the US GDP rate will slow down. That is why they exit the US dollar longs. The matter is that the euro has many flaws; so, it is too early to state that the EURUSD correction is fading. The EURUSD is likely to return in the middle-term consolidation on the range of 1.15-1.185.
By September 24, Italian government will have to present a draft budget, and taking into account the measures, promised during the election campaign, the budget deficit may be up to 5% of GDP. It is more than the EU demands and the agreed with Brussels value of 1.6% of GDP in 2018 and 0.8% of GDP in 2019. Political risks, trade wars that result in slower recovery of the Euro-area economy don’t suggest the euro surge in the near future.
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