Concerns about a decline in the US inflation rate and the rumours about trade war talks between the U.S. and China drew EURUSD up above figure 1.16
Speech is silver, silence is golden. However, it is better to talk than to keep silent sometimes. China’s officials are likely to know it and should accept the Washington offer to hold a new round of high-level talks; although the U.S. president’s top economic advisor can’t provide any guarantees that they will succeed. The China’s rhetoric has softness recently; in addition, the U.S. officials are already facing the growing discontent inside the country because of the import tariffs impact on the U.S. economy. The U.S. foreign trade deficit, also because of the opponents’ retaliatory measure, is widening; and the Fed Beige Book suggests that the corporation reduce their business investments due to increasing uncertainty. The Republicans are facing mid-term elections, and the public discontent is not the best environment for them.
The rumours about a new round of the U.S. trade talks with China; Mexico’s willingness to take part in the bilateral deal with the USA; the progress in the negotiations between Canada and the USA; improved relations between the EU and the U.K. are believed to easing of trade tensions. It supports the Chinese yuan and the emerging markets’ currencies, in general. At the same time the pressure on the U.S. dollar is increasing, as one of its major advantages is the EM problems.
Another blow on the EURUSD bears’ positions has been delivered by the US producer price index that unexpectedly dropped in August for the first time since February, 2017. Even is the markets believe it to be temporary situation, resulted from a decline in the services cost in the trade with Russia, the concerns about a decline the US inflation rate encourage investors to sell off the U.S. dollar. The most exact description of what’s going on has been given by the FOMC member Lael Brainard. According to her, the Fed will have to normalize its monetary policy fastener if the PCE growth rate increases. It is reasonable to assume the opposite: the U.S. inflation rate slowdown will pause the increasing of the fed funds rate.
Dynamics of the U.S. producer prices
Source: Wall Street Journal
In the light of the above, it follows that the report on the U.S. consumer prices and the core inflation will become the highlight of the week, ending September, 14. It is going to be more important than the ECB meeting, which nobody expects any surprises from. The European central bank is reducing the QE volume and is not going to increase its rate until September, 2019. Besides, the derivative market expects it only in the end of 2019; and Mario Draghi’s rhetoric, together with a change in the projections can move the date to a later, oe an earlier, period, which has a direct influence on the euro rate.
Projections for the deposit-rate rise
They’ll go on discussing QE extending only in case of the further decline in the Euro-area economy, increased turmoil in the emerging markets and the escalation of the Italian political crisis. Otherwise, provided there is positive statistics on Eurozone GDP growth, good news from EM economies, as well as form Italy, will strengthen the euro. Therefore, the report on the U.S. inflation in August and Mario Draghi’s press-conference will determine the EURUSD further trend; whether it will progress up towards the resistances at 1.171 and 1.1735 or drop down to the base of figure 16 again.
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Price chart of EURUSD in real time mode
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