Central banks punished the greenback for the Fed’s surprise in January
When Jerome Powell announced the unexpected change in the Fed’s course, which had been going to hike the interest rate just a few weeks before and followed with a long break, the US dollar uptrend seemed to be over. However, as the ECB revised its forecasts for the GDP and inflation down, announced a fresh round of LTRO, willing to retain the current interest rates longer than it had originally meant, the USD surged to the highest levels since summer, 2017. It was 10% higher than the lows the previous year. The market response to the outcomes of the ECB meeting in March is a good example of the greenback penalty for the Fed finishing its normalization cycle earlier than it had been expected by investors. If the Fed doesn’t mind weakening its local currency, then why shouldn’t other central banks do the same?
The trends of emerging markets’ currencies are the further evidence of the statement that it is not the dollar that it strong, it is its rivals that are weak. MSCI Emerging Markets has been 8% up since the beginning of the year, the Russian ruble, the Brazilian real and the South African rand are among the leaders of more than 30 most traded in Forex currencies. Their issuing central banks won’t punish the Fed for the surprise in January. Jerome Powell himself believes the federal funds rate to be at approximately neutral level, which is a very good place. Before taking any measures in future, the Fed is going to wait and see the processes of global growth decline, US-China trade battles, and tightening of financial conditions. According to the Fed CEO, based on the fundamental estimate, the stock market is close to its normal long-term levels.
Dynamics of the Fed rate
Source: Wall Street Journal
Three decades ago, the chief US banker didn’t use to speak with investors, and only well-paid Wall Street analysts, who had access to accompanying statements from the Fed, could understand what was going on in the market. Nowadays, the Fed policy is as transparent as never before. Therefore, the EUR/USD further trend strongly depends on the ECB and on the market response to its decisions. The euro bears’ inability to drive it deeper amid the Governing Council’s dovish rhetoric suggests that most of the negative has been already priced. It is proven by the largest net shorts on the euro since December, 2016.
Dynamics of net positions in euro
According to the ECB board member Benoit Coeure, the fresh package of the LTRO is not the reversing of the ECB course towards monetary expansion. It is just a response to the economy slowdown that occurred sooner than the regulator had expected.
In my opinion, an essential condition for the EUR/USD bullish trend recovery is the buyers’ ability to hold up the rate above level 1.125 and draw it up towards the centre of the middle-term trading range of 1.125-1.15.
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Price chart of EURUSD in real time mode
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