EUR/USD tends to consolidation in the range of 1.125-1.155

Too much ado about nothing. The EU response to Rome seemed too tough at first, but the financial markets were in no way shocked. Brussels charges Italy with “particularly serious non-compliance” with EU rules. Italy is going to face penalties and fines. It is likely to be about a sanction of about 0.2% of Italy’s GDP. Investors don’t worry as the procedure is going to take quite a long time. The soonest, it will be inflicted in summer 2019. If it happens at all.  Brussels forgave Spain, Belgium and France once; so, it could be the same with Italy.

The euro has brightly responded to the news that Italy’s deputy prime minister Matteo Salvini is willing to revise the country’s 2019 draft budget. Even if the League leader has noted a little later that he isn’t going to change the deficit target of 2.4% of GDP. The government is convinced that the Italian economy will grow 1.5% over the next year. Even though Italy’s national statistics agency, revised down its growth forecast for 2018 and 2019 to 1.1% and 1.3% respectively. According to the agency, each 100 bps, added to Italian bond yield slows down the GDP growth by 0.7 percentage points. Rome must be happy that the bond market has ignored the EU response. However, it should be understood that the long-lasting political uncertainty affects business activities, and eventually press the GDP rate down.

The euro hasn’t crashed, and the EURUSD bulls have again come up to the idea of selling the U.S. dollar, as the Fed’s monetary normalization may get slower. The FOMC representatives’ comments suggest that a pause in the monetary restrictions mostly results from a decline in global economy’s expansion. THE OECD forecast proves that the federal funds rate will be increasing slower in 2019 than in 2018. The intergovernmental economic organization reports that global GDP has reached its growth-peak in the current year and will be going down to 3.5%, from 3.7%. It can decrease to even 3% in 2020, affected by trade wars, high oil prices and the capital outflow from emerging markets.

OECD projections

SourceFinancial Times

It is said in the market that the Fed is going to tighten its monetary policy in December, though, it would take a long break after that. After all, Patrick Harker’s speech suggests that the FOMC last meeting in 2018 is going to be hot. Philadelphia Fed president is not willing to vote for one more interest rate hike because of rather low projections for the U.S. inflation rate. If the Committee revises down its projections for the key macroeconomic indices, it will hit the U.S. dollar.

I still think that the market’s enthusiasm about selling the greenback to be unreasonable. Yes, speculators have strong arguments for getting rid of the dollar, which running out of power. The matter is what can substitute it? Until there isn’t an answer, the EURUSD is getting more likely to consolidate in the range of 1.125-1.155.


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Price chart of EURUSD in real time mode

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