The ECB president’s dovish rhetoric triggered EUR/USD sales
When investors are not sure that the trade war driver will work, they prefer reliable factors. Mario Draghi’s dovish rhetoric in the Portuguese Sintra emphasized the interest in the divergence in monetary policies and sent EUR/USD down to the zone of 11-month lows. The ECB president claimed the Governing Council to be willing to revise its plans for QE end, the interest rate could remain at the current low level during a longer period of time, than it had indicated before (September 2019); and the following monetary normalization would advance at a very slow pace.
The press conference held by the presidents of the Fed, the ECB, the Bank of Japan and the Reserve Bank of Australia is scheduled in Sintra on June 20. If Mario Draghi is concerned about economy’s decline in the Eurozone, Haruhiko Kuroda is trying very hard but fails in reaching the inflation target, and Phillip Lowe is afraid of trade wars, then Jerome Powell feels very confident. He is backed up by the US strong economy that enables the Fed to raise its interest rate up to 3% and higher. Is it surprising that, after this contrast, the US dollar is growing stronger against its G10 rivals?
Dynamics of the Fed Funds rate and the USD index
Source: Trading Economics
Unlike divergence, trade conflicts remain unclear. On the one hand, a decline in the US Treasury yield, consumer spending and GDP is a bearish factor for the greenback. The history also confirms selling USD: in the 1990s and the 2000s, dollar was falling down in similar situations. On the other hand, tariffs draw the import prices up, speed up the inflation rate and make the Fed aggressively raise the federal funds rate. The greenback is still seen as a safe heaven currency by many; so, strong turbulence increases the demand for it. I, personally, think the market passively responds to the trade conflict escalation just because people do not understand how to trade the trade war factor correctly.
Donald Trump goes on raising the stakes, scaring his trade partners with the tariffs like “$200 bn + $ 200 bn”. If China responds to the first part of the threats, it will get the second one. The president Trump’s trade adviser Peter Navarro notes that China’s export into the USA worth $500 bn is a good target, compared to the USA $130-bn export to China. Investor can do nothing but wonder what Beijing will respond with. The yuan devaluing? Or with sales of the US Treasuries? A trial balloon floated earlier his year, when the increase in the US debt market rates was accompanied by the USD index drop.
Things are heating up; investors are waiting for new clues from the Portuguese Sintra and have to act with a view to trade wars. As a result, EUR/USD bulls have managed to keep the pair from sinking below the May’s low and count on forming the consolidation range in 1.15-1.18.
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