EUR/USD speculative positions depend on Jerome Powell’s speech
The U.S. dollar couldn’t use the former drivers once again. The U.S. - China negotiations haven’t been that successful; the opponents boosted the amount of mutual tariffs up to $50 billion, from $34 billion and are willing to implement the threats. The probability of four hikes of the federal funds rate are up at 68%, from 63, after the Fed’s representatives claimed the central bank to be independent from politics.
According to the president of Kansas City Fed, Esther George, politics doesn’t affect the Fed monetary policy in any way. The FOMC must be focused on carrying out the mandate, entrusted to it by the Congress, to make decisions for supporting the U.S. further economic expansion in the long term. Dallas Fed’s CEO, Robert Kaplan is sure that political tensions won’t influence the central bank’s activities. It will continue its monetary policy.
The Federal Reserve is not governed by a single person, and, even if Jerome Powell wanted to act, according to Donald Trump, He would hardly be supported by the FOMC. The U.S. strong economy allows the central bank to normalize its monetary policy, especially since other regulators are doing the same. According to the minutes of the ECB meeting in June, the Governing Council is growing more confident in giving up on the monetary stimulus soon. The Bank of Japan is also reducing the assets buyouts volume within QE. AS a result, the markets are supplied with a less amount of liquidity, creating serious troubles for emerging markets.
Dynamics of the asset buyout to the GDP
Source: Wall Street Journal
In theory, it may be one of the reasons for Jerome Powell’s dovish rhetoric in Jackson Hole. The Fed had already abandoned its plans federal funds rate hikes due to the turmoil in the Chinese markets in 2015 and 2016; however, at present, the drop of Shanghai Composite and the yuan is interpreted as China’s defeat in the trade war. Other reasons for a pause in the monetary normalization are the U.S. protectionism, the flattening yield curve and the last Fed’s research, suggesting that its shouldn’t be too positive about the U.S. unemployment rate drop below 4% and hike the rate immediately. The monetary policy is being corrected with a time lag.
It should be understood that a try to suspend the monetary normalization will be interpreted by the financial markets as the Fed’s undermined credibility. Especially since not only the U.S. economic expansion, but the global GDP as well, allow the central banks to increase the interest rates gradually. According to the IMF, global GDP will be 3.9% up in 2018, which is the best result since 2010-2011. The OECD expects a higher growth rate in the in 20 advanced economies out of 45.
I, personally, believe that EURUSD bears are unwilling to get use of the former benefits because they expect Jerome Powell’s speech and are discouraged by the euro going up above 1.15. In addition to that nobody wants to put the cart before the horse, the people have also lost their money. Now, they won’t be that willing to open euro shorts again.
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