EUR/USD correction lets the central bank’s plenipotentiaries sound hawkish

It seems that neither Italian political crisis, nor trade conflicts escalation, nor Eurozone economy decline is going to stop the monetary normalization start by the ECB. The chief economist Peter Praet announced that the details of quitting €2.55-bn quantitative easing would be discussed at the Governing Council meeting on June 14. The markets expected these issues to be dealt with no sooner than in July. So, drawing the start to an early period encouraged EUR/USD bulls to go ahead.

Some people haven’t expected Peter Praet and Jens Weidmann, who hinted at the reality of the market expectations of quantitative easing program to end in 2018, to sound hawkish; others, on the contrary, rub their hands in jubilation. Euro bears remembered about weak core inflation (1.1%), while Société Générale emphasized it didn’t doubt in the ECB's victory in the fight with Italy that would draw EUR/USD up towards 1.3.

At the same time, the pleasant for euro bulls surprise hasn’t resulted in a fabulous attack. Investors aren’t willing to buy the major currency pair as they worry about the arguments between the Brussels and Rome, the EU and the USA at the G7 summit in Canada on June 8-9. Yes, the new Italian government isn’t going to discuss leaving the euro, but it presented the program, conflicting with the EU principles by many points. As a result, the gap between Italian and German bond yields is getting wider again, which suggests the political risks still remain in the Eurozone.

Dynamics of spread between Italian and German bond yields
 
Source: Bloomberg

Nevertheless, trade wars also arise some concerns. The US president’s top economic adviser, Larry Kudlow is not going to give up, and the EU imposes new tariffs on the US imports worth €2.8 starting from July. The Brussels estimates the future European export losses, resulted from the US tariffs on steel and aluminum imports, at €6 bn.

 

So, euro is going to wait and see, while dollar is gradually losing its fans. 35 out of 60 Reuters experts don’t think the greenback will succeed longer than three months; 10 of them are sure that USD index will go down within the next month. 15 analysts give it half a year. Only 17% of experts expect the dollar rally to last longer. 40% of respondents think the EUR/USD uptrend will restore mainly due to the central banks’ monetary policy. Meanwhile, the main currency pair is trying to consolidate above figure 18 base and is gathering the powers to storm the resistance at 1.183.


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Price chart of EURUSD in real time mode

Euro Enters ECB Comfort Zone

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