EURUSD needs new drivers to exit the consolidation range of 1.15-1.2

Everything blows over. Both good and bad. The US dollar has worked out the factor of the higher US GDP rate from 2.2% up to 4.1% in the second quarter and is frozen waiting. It needs a new driver to continue the rally. Even if Donald Trump indignantly rejects the idea that the peak has been passed and the U.S. economy will expand not that fast in future than it used to in April-June, logic proves the opposite. Fading out the effect of the fiscal stimulus, influence of the Fed’s monetary restriction, uncertainty, associated with trade wars, and strong dollar can set back the US GDP growth in the second half of 2018.

Investors were going to fix the profit according to the U.S. economic growth at 4.1% but they were discouraged by two things. First, the part of net export in the U.S. GDP growth was 1.06 bps, which, compared to over 5% USD index increase in the second quarter, doesn’t look to be a norm. Second, if it is not dollar, then what? What G10 currency looks more appealing than the US dollar at present? The IMF lowered its growth forecasts for the European and Japanese economies. The USA avoided it.

GDP growth forecasts
  

Source: Bloomberg

Of course, we may assume that the positive impact of the euro devaluation on the export-led Euro-area, combined with the trade war truce between Washington and Brussels, can trigger EURUSD growth. But who said that a pause in a war always results in a lasting peace? Donald Trump claims he has opened up Europe for the U.S. farmers. But the EU representatives note sarcastically that soybeans and beef products are not all the agriculture.

Euro has many flaws. As indeed has the dollar. The same share of net export in the US GDP growth could have resulted from increased activity of suppliers, due to the concerns about soon import tariffs. The situation may completely change in the third quarter.

Yes, strong statistics on the US GDP growth proves that the second longest economic expansion, started in 2009, is not going to end soon. Much will depend on the Fed, particularly, on the speed of its monetary normalization. In this respect, it is quite reasonable that investors are focused on the upcoming FOMC meeting. The focus is on two main scenarios. The first suggests that the US unemployment rate will be decreasing fast, resulting in the inflation rate increase and aggressive hiking of the federal funds rate (according to Morgan Stanley, PCE will hit 3% if the U.S. unemployment is below the balance level (4.1%-4.7%) by 1.5 bps. The second one is based on the assumption that the Fed will manage to keep the inflation rate steady due to the stabilized unemployment rate.

So, the further EURUSD trend will depend on the old drivers: the pace of the European and the U.S. economic expansion, and the monetary policies, held by the central banks. They will be affected by trade wars and political risks. In general, until the Fed and (or) the ECB change their political courses the EURUSD pair will hardly leave the consolidation range of 1.15-1.3.

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Real-time price chart of EURUSD

Dollar Hits a Pause

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