EUR/USD bulls couldn’t break higher than figure 18 base as the Governing council representatives emphasized the ECB commitment to ultra-easy monetary policy
The Dovish rhetoric of the ECB Governing Council’s representatives and New York Fed’s information about increased expectations for the US inflation up to 3% at the end of one and three years made the market remember about the divergence in monetary policies and enabled EUR/USD bears to go ahead for a counter attack. According to Mario Draghi, the European central bank’s aggressive measures within its €2.4- bn quantitative easing program will boost the Eurozone inflation growth by to 1.9% in the coming years. One of the Governing Council's main hawks Ewald Nowotny confirmed that the interest rate would remain at the current levels through at least summer, 2019.
The ECB is sticking to its ultra-easy monetary policy, and whether it will normalize it depends on the income data. Will the Euro-area restore or not after its poor start in 2018? Won’t it be set back by trade wars and the political crisis in Italy? At the same time, an increase in the US expected inflation rate is another argument for the Fed’s aggressive monetary restriction. Goldman Sachs still suggests a high probability of the inflation growth amid the strong labour market and the supportive trading environment for CPI and PCE. I, personally, think the greenback may improve its positions in the next few days, as investors include into the quotes of dollar currency pairs the possible increase in the consumer prices growth up to 2.9%, form 2.8% and core inflation by 2.3%, from 2.2%. The indexes release is planned on July 12.
So, according to Goldman Sachs, trade wars make PCE more likely to increase, supporting the aggressive hiking of the federal funds rate. If so, Trump’s plan to cut the US foreign trade deficit is going to fail. Dollar strengthening slows down the export. At the same time, the countries, targeted by the US import tariffs receive less money. That is, their ability to buy the US products declines. As a result, the US export will face a double challenge, which makes the US president’s plans to cut the country’s foreign trade deficit by means of tariffs look inefficient. Of course, other countries can borrow the money in the capital markets; however, according to the synchronized dynamics of the US export and import, both indicators are closely connected.
Dynamics of the US export and import
Source: Wall Street Journal
It is remarkable that, according to Ewald Nowotny, trade wars can trigger currency wars. The countries will try to address the problems with the US new import tariffs by means of the competitive devaluation of their own national currencies. There is already something like this in China, and I won’t be surprised if other countries and regions do the same.
EUR/USD bulls’ inability to draw the pair quotes above figure 18 base revealed their weakness and triggered a wave of sales. The breakout of the support at 1.172 that was previously the resistance will make the quotes more likely to continue declining. On the contrary, the rebound will restore the bulls’ hopes to gain back the control over the pair soon.
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