EUR/USD has closely approached the bottom border of the consolidation range of 1.15-1.185 due to the strong data on the US employment and the trade war escalation

Ahead the release of the report on the US employment, New York Fed president John Williams had noted that the US economy was strong, employment was increasing at a good pace, but there wasn’t inflation pressure at the same time. He didn’t think that the Fed should hike the federal funds rate too fast. This speech became a kind of explanation of what is going on in the market now. The US average hourly earnings are 2.9% up Y-o-Y, which is the highest rate since 2009. It sent EURUSD down to the bottom of figure 15. If the leading indicator suggests the inflation increase, then there is a missing element in the equation, suggested by the Fed’s top official. Is it time to hike the rate aggressively?

The markets responded to the US Department of Labor rather strongly. CME derivatives increased the probability of four hikes of the federal funds rate to 79%, from 67%. Hardly anybody believes that the rate will be retained at the current 2% level at the FOMC meeting on September 24 - September 25 (1.6%). 10-year Treasury yield is going up, driving the yield curve up from the lowest level since 2007. Previously, investors didn’t believe that the US inflation rate will increase, pressing the long-term bonds yield.

Dynamics of the U.S. Treasury yields

Source: Wall Street Journal

According to Boston Fed president Eric Rosengren, the Fed should tighten its monetary policy in September and December. In 2019, the interest rate should be drawn up to the neutral level that is suggested to be at 3% by the official. If the US economy growth rate continues increasing and the employment is further improving, the monetary policy can be restricted at a higher pace.

The idea of divergence in monetary policies is back to the markets again. It has been a strong advantage of the USD bulls in 2014-2018. Currently, it is not a single growth driver for the US dollar. Donald Trump has suggested a possible expansion of the tariffs on China’s imports by another $267 billion. In addition to the $200-billion tariffs that are just about to come into effect. According to the US president, the introduction of more tariffs will depend on what is going on now. It is clearly about China’s response.

Washington again offers Beijing a game of poker, threatening to increase the total amount of import tariffs to $505 billion. As a result, Chinese economy is likely to collapse, followed by many other merging markets’ economies. The Asian countries will suffer the most, as they have been increasing their dollar-denominated debt the most, compared to the other developing countries; now, they face serious problems, resulted from a higher cost of the debt management and repayment

Dynamics of dollar-denominated debt

Source: Financial Times

Euro tries to get an advantage from Italy. Brussels announced that Rome had promised to work on reducing its national debt, which cuts down the risks of a sharp increase in the budget deficit in the draft plan, presented by the euro skeptics, and eases investors’ concerns. EURUSD is still consolidating in the range of 1.15-1.185, having closely approached its bottom border.

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Price chart of EURUSD in real time mode

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