EUR/USD is likely to consolidate in the range of 1.15-1.185, according to fundamental factors
What happened to the greenback? Just in the mid-August, Donald Trump was boasting that “Money is pouring into our cherished DOLLAR like rarely before”, and EURUSD was trading close to the 13-month low. Scarcely two weeks have gone since that and the situation is completely different. Most speculators are exiting USD longs and the euro price is testing figure 17 base. That is Forex. If you are not prepared for such changes, you won’t stay there for long.
I keep saying that the key drivers for the dollar strengthening in April-August period have become the gap in the economic growth and monetary policies, U.S. protectionism and the weakness of the competing currencies. The USD growth was supported by the turmoil in the emerging markets. At the end of summer, it is clear that the central banks are willing to protect their local currencies. China has revived the “counter-cyclical factor”, abandoned in early 2018; Russia has suspended purchasing of foreign currencies; Turkey is hiking the interest rate. In the short-term, it gets the yuan, the ruble and the lira steady; but on the long-term investment scope, the reduction in the balance sheets of the global leading central banks will continue pressing the EM currencies. The Fed’s Treasury holdings are reduced by $150 billion. Even though the ECB and the Bank of Japan continue buying out assets within QE, the European central bank is going to quit the program already in 2018, and the BoJ will substantially cut its volume.
Changes in the central banks’ QE bondholdings
Dollar is also pressed by the US-China trade talks and the progress in the trade relations between the USA and Mexico. In fact, it is still too early to suggest the end of the trade conflict between Washington and Beijing; and Donald Trump’s success in NAFTA talks may become the beginning of the end. The relocation of the automobile industry from Mexico into the USA will increase the costs and badly affect consumers. At the same time, car producers will search for the opportunities to move into Asia and other continents. To avoid it, the U.S. president will have to increase the tariffs! Trade war is a long-lasting process. And it works to the U.S. dollar’s advantage.
I think one of the strongest speculators’ concerns is a potential slowdown in the U.S. economy growth. It can make the Fed to change its plans for the rate increases. The U.S. economic surprise index is down to the lowest level since 2017; and a higher foreign trade deficit made Macroeconomic Advisers lower the expected U.S GDP rate down to 3.1% in the third quarter.
U.S. economic surprise index
If Jerome Powell is so confident that the inflation rate won’t much exceed its 2% target, and the U.S. economy growth starts slowing down, the Fed will have strong reasons to suspend its monetary normalization. Along with Donald Trump’s comments, this factor makes speculators more likely to sell the dollar.
EURUSD bulls couldn’t storm the resistance at 1.173 on the first try. The euro is down below figure 17 base; traders are waiting for the report on the U.S. GDP in April-June period. If it is lower than preliminary data, euro bulls can be encouraged to go ahead.
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Price chart of EURUSD in real time mode
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