Different paces of economic growth and monetary policies won’t provide so strong support to EURUSD bears as they used to
The Fed is willing to go on normalizing monetary policy but leaves some loopholes to go back. The minutes of the last FOMC meeting indicated that the U.S. officials consider more federal funds rate hikes in the near future to be relevant if the U.S. economy is expanding according to the projections. At the same time, some Committee members expressed concerns about the influence of trade wars, and weakening of the fiscal stimulus affect and more aggressive than it had been expected on the U.S. GDP.
The central bank’s position corresponds to the Reuters forecasts. According to the poll of more than 100 experts, dated August 13-21, the U.S. economy growth will slow down in the near future. They suggest the U.S. GDP to be 3% up in June-September period, for the period of October-December, it is expected to be 2.7% up. Almost two thirds of 56 respondents said about negative influence of trade wars on the U.S. GDP. According to the Fed, the U.S. protectionism hinders the growth of 10-year Treasury yield, resulting in flattening of the yield curve down to the lowest level since 2007. The indicator inversion during the last five decades has indicated the economic recession quite accurately.
The main drivers for EURUSD drop in April-August period were the gap in the Fed’s and the ECB’s monetary policies, as well as the growth-gap between the U.S. and euro-area GDP. However, if the situation in the USA is getting worse, it will be not Donald Trump’s comments that will draw the U.S. dollar down. And the first bad signs are already appearing: the U.S. economic surprise index is worse than its European peer.
Dynamics of economic surprise indexes
The situation in 2014 and in 2017 proves that a series of disappointing data on the U.S. indicators together with extended positioning in the bond market results in the yields drop, which should be interpreted as bearish factor for the U.S. dollar. The bond yields haven’t dropped yet, but they may do it any moment.
Dynamics of Treasuries speculative positions and yield
The breakout of the important level of 1.15 by EURUSD resulted in growing number of bears in the market and a lower Bloomberg experts’ consensus forecast for the euro price of the for late 2018 of 1.18, down from 1.27 in March. However, it is still higher than the current quotes. UBS also lowered down the euro expected price to 1.2, from 1.25. JP Morgan, on the contrary, expects the euro to hit $1.12.
Therefore, to restore the EURUSD long-term uptrend, the major currency pair needs the effort from both sides. The U.S. economy should lose the power, and the Fed should make a pause in normalizing its monetary policy. The Eurozone, on the other hand, should feature a higher economic growth rate, and lower policy risks in Italy the EU-U.S. trade war truce should continue. If just a couple of weeks, all of these didn’t seem to be real, then now, at least four out five conditions can well be fulfilled. I, personally, believe that euro bears can count on a further decline only in case EURUSD drops lower than 1.134. Meanwhile, it makes some sense to use the price rebounds from the supports at 1.15 and 1.146 for entering longs.
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Price chart of EURUSD in real time mode
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