The U.S. president’s comments make EUR/USD bears step back
Do not run counter the Fed. Investors have believed it to be the law for a few decades. However, there are people, who ignore the laws. And he is Donald Trump. One matter is to criticize the central bank’s policy; another matter is to call it mad. Donald Trump worries too much about the U.S. stock indexes; so, their worst drop since February encouraged him to look for the responsible. The U.S. president doesn't believe that the S&P 500 resulted from the U.S. - China trade battle. According to Trump, the Fed, increasing the rate too fast, is responsible. It is ridiculous.
The U.S. stock indexes crashed due to the fears that the USA will soon officially declare China to be exchange rate manipulator, as well as due to the too fast increase in the U.S. Treasury yield. Steve Mnuchin has also made his contribution; he warned China not to interfere in the Forex rates. USD/CNY has been 10% up since April, and is trading around the psychologically important level of 7; the U.S. Treasury Department can well use the word “manipulator” in the report, released in October. This fact can trigger a new wave of turmoil in the financial markets; besides, even the IMF admits that the yuan devaluation partially resulted from the trade wars.
Dynamics of the U.S. Treasury yield and Dow Jones Industrial Average
Source: Trading Economics
Donald Trump is also responsible for what is going on in the U.S. debt market. Escalations of the U.S. - China trade tensions limited the U.S. bond yield increase. The rates should have grow amid the Fed’s transparent policy. The central bank announced its plans long ago; however, in the context of geopolitical tension, investors were not willing to sell safe assets. In October, 10-year Treasury yield has broken through the important level of 3.1%, encouraging the bond bears to go ahead. That is what the markets are: trend are followed by consolidations, and the trading channels are being replaced by new trends.
So, to find the responsible, Donald Trump should have a look at the mirror, rather than point to the Fed or China. The U.S. dollar has been down mostly due to the U.S. president’s comments and the S&P 500 drawdown. The EURUSD rate has broken through the trading range of 1.146-1.154 also because of a decline in the U.S. producer price index in September down to 2.6%, compared to 3.4% in June. The index dynamics suggests that the Fed can really pause the monetary normalization.
Dynamics of the U.S. Fed funds rate and the U.S. producer price index
Source: Trading Economics
The euro was supported by the improvement of the U.K.-EU relations, in terms of Brexit; it has a positive influence on all European currencies. The second bears’ try over the past two month to draw EURUSD rate beyond the trading range of 1.15-1.185 can fail, suggesting the sellers’ weakness.
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Price chart of EURUSD in real time mode
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