Donald Trump’s criticism is likely to have a temporary effect on EUR/USD

If you hit your opponent at the right time and in the right place, it will have a much stronger effect. If earlier Donald Trump’s comments sounded like blank shots, the president’s focus on inflation has had its effect in October. Why the Fed is hiking the rate and increasing the U.S. borrowing costs if the consumer price index is down to 2.3% in September, from almost 3% in the June-July period? A decline in CPI rate lured investors back to the U.S. Treasuries, drew the 10-year yields beyond the zone of 7-year highs and pressed down the greenback. At the same time, global stock indexes continue going down.

Crash of global stock indexes

Source: Wall Street Journal

Even if Donald Trump calls the Fed’s policy to be mad, according to the Managing Director of the IMF president Christine Lagarde, the central bank’s measures are legal and necessary. Jerome Powell has clearly explained what choice the regulator have to make.

If it raises the fed funds rate too fast, the risks of the economic expansion end and the inflation drop below 2% will increase. On the contrary, too slow monetary normalization will result in the economy overheating and PCE will run out of control, widening the imbalance in the financial markets. The U.S. president’s advisor Larry Kudlow also understands it. He has tried to comfort investors, saying that the Fed’s monetary restriction is a sign of the U.S. strong economy, central bank is independent and the U.S. president is not willing to interfere.

I don’t think that the Federal reserve, following Trump’s criticism or the turmoil in the financial markets, will put off its plans for normalizing its monetary policy. In February, global stock indexes were also in a mess, however it didn’t prevent the central bank from hiking the fed funds rate in March. Currently, the derivative market suggest over 89% probability of its increase up to 2.5% in December. In addition, the consumer price index drop in September resulted from lower energy costs, the index is 0.5% down M-o-M.; however, the indicator is up again in October.

Fed funds rate probabilities for December

Source: CME Group

So, despite EURUSD bulls’ success, I don’t yet see any strong reasons for the uptrend recovery. It is all about exiting dollar longs by investors, scared off by Donald Trump’s comments. At the same time, German government cuts down its forecasts for German GDP in 2018 to 1.8%, from 2.3%; in 2019 – to 1.8%, from 2.1%. The ECB is doing the same for the Eurozone economy growth (2%, from 2.1%, and 1.8%, from 1.9% respectively). The Italy and the U.K. problems are far from being settled, and inflation failure to rise higher than 1% allows the European central bank do nothing. The Euro looks too week to surge right away and reach $1.2 by the end of the year.

Another matter, if the greenback is being pressed by the political factor. I personally expect the continuous EURUSD consolidation in the range of 1.145-1.185 and suggest going on to trade with narrow targets.

 


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Price chart of EURUSD in real time mode

Dollar Respects the Fed’s Decision

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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