Before the Fed hikes the interest rate once again, it should assess the economy response

The U.S. dollar lured investors back as the three major Wall Street stock indexes are up by 2% and more, the U.S. industrial production has been expanding over four consecutive months, and the number of new jobs has been breaking through its all-time highs. However, another Donald Trump’s critical comment of the Fed encouraged the EURUSD bulls to hold up the levels taken. The U.S. president claimed the central bank to be his biggest danger, as it is hiking the fed funds rate despite the low inflation growth pace. The president hasn’t talked to Jerome Powell, but he is not satisfied with the measures, taken by the Fed chairman.

It’s one thing when you once expressed discontent and haven’t said anything for a few months; another matter is when you don't stop criticizing. Although the FOMC member may not like to learn from the media that they gave in to the U.S. president, investors can well take the political factor into consideration when assessing the Fed’s activities. With this respect, any slightest slide down of the U.S. macroeconomic statistics, fueled by the verbal interventions, can trigger a new wave of the greenback sales. And there are mid-term elections approaching; Democrats are likely to win the majority of seats in the House of Representatives and Republicans are likely to hold control of the Senate. According to TD Securities, it will draw the political risks to the USA from the Old World and result in EURUSD price growth.

Forecasts for EUR/USD

Source: Bloomberg

I feel real sympathy for the Fed. Rather than calmly examine how much ripple makes the toe put in the water, that is, see the economy reaction, it is challenged by the U.S. president’s pressure. That is how Federal Reserve Bank of San Francisco President Mary Daly describes the process of the interest-rate increasing. She favors continued gradual monetary normalization, though she doesn’t say how many fed funds rate hikes in 2018-2019 would satisfy her. I believe the central bank to have chosen the correct policy. It still thinks the current interest rate to be too low, stimulating the economy that doesn’t need the stimulus. Therefore, the borrowing costs should be increased. The point is in how much it should be. What is the value of the neutral rate, so widely discussed in the markets. The minutes of the FOMC meeting in September may give a clue.

The Euro is still pressed by Italian political crisis. The budget plan, suggesting the deficit of 2.4% of GDP, has been presented to Brussels. The latter should announce its final decision within the next two weeks. The deficit rate itself is big, but it should result in panic, as it is less than the budget deficit in France, Spain, or the USA. Another matter is that the plans of Rome may turn out to be unrealistic; and a slower economic expansion amid high borrowing costs may result in a worse financial state.

The second in the last few days EUR USD bulls’ try to storm the resistance at 1.161 failed; and the consolidation ahead the important release of the FOMC meeting’s minutes makes the EURUSD more likely to actively respond.


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Price chart of EURUSD in real time mode

Dollar Makes a Ripple In the Water

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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