EUR/USD bears miss the support from the Fed and trade war

The market responded to the release of the FOMC meeting’s minutes rather calmly, finding it neutral. Ahead the important event, they’d thought the Fed would worry about trade wars, flattening of the yield curve and dollar, growing too strong. The Fed a kind of worried about only the trade battle that could set back the central bank’s forecast. The Fed suggests that the short-term bond yield is higher than the long-term one because the buyouts within QE. They didn’t mention the strong greenback.

At the same time, the Fed didn’t encourage hawks as well. Yes, next year, it is willing to hike the federal funds rate above the neutral level (2.9%) to avoid the economy’s overheating, but it doesn’t mean giving up the gradual monetary restriction.

FOMC projections for the federal funds rate

Source: Bloomberg

After the publication of the FOMC meeting’s minutes in June, the chances for four monetary restrictions in 2018 increased up to 55%, 10-year Treasury yield was up, but dollar couldn’t take an advantage of it. Investors were impressed by the surge of German manufacturing orders in May (+2.6% M-o-M and +4.4% Y-o-Y), which, I think, is another evidence of their excessive interest in the Euro-area macroeconomic statistics

The derivative market doesn’t expect the ECB to increase the interest rate until late 2019 after the central bank tried to regain control over the yield curve by announcing to retain the rate at the current levels until August, 2019. It resulted from the weak statistics as well. If it improves, the chances move closer to September, which is a bullish factor for EUR/USD.

Dynamics of German bond yield

Source: Bloomberg

Financial markets didn’t much respond to the news about the US tariffs on China’s imports worth $34 bn. First, the effects will influence the economies only in a few months. Second, Beijing hasn’t provided a clear answer about its next measures. China seems to be willing to fight right away, but the words “when necessary” raise doubts. Investors remembered that in the ages of Reagan and Bush, Japan didn’t avenge the USA and agreed to increase the import of the US semi-conductors and cut its car export. The market may expect the concessions from China. Especially since Donald Trump went on raising the bet for the game, claiming that $200-bn tariffs might be followed by another $300 bn.

It is remarkable that the US president also takes part in the highlight of the first week in July, the report on the labour market. In June, he shocked investors community by his tweet, published ahead the official statistics; now, everybody expects the same. Moreover, they wonder, whether the report will be negative if there isn’t a tweet. The first storm of the resistance at 1.172 was fought off by EUR/USD bears, but bulls are still willing to go ahead.

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Dollar Tossed the Pitch

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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