Verbal interventions encouraged EUR/USD bulls to draw the rate above figure 15 bottom

If you lose a game but don’t lose your heart, you have either no fear or a Joker in your deck. In 2018, such a Joker for EUR USD bulls has become the U.S. administration, headed by Donald Trump. Hardly had the single European currency approached the dangerous border, when the U.S. president and the Treasury Secretary got back to their favourite topic and resorted to verbal interventions. Steven Mnuchin warned China not to manipulate the exchange rates, and the U.S. president again criticized the Fed.

Donald Trump repeated his complaints about too fast increasing the Fed funds rate. If the U.S inflation rate is controlled, and the central bank doesn’t see any reasons for its fast increases, then, why should it tighten its monetary policy? The president hasn’t spoken about this with Jerome Powell, as he wouldn’t like to interfere with the Fed’s policy. Hasn’t he yet spoken? Wouldn’t he yet like? Although the U.S. administration hasn’t set back the Federal reserve for the past few years, the strong criticism by the U.S. officials suggests that everything is going to be different. If the U.S. president has said “A”, why shouldn’t he say “B”?

Dynamics of the U.S. inflation rate

Source: Bloomberg

At first, Donald Trump may seem to be right. The surge of 10-year Treasury yield up to seven-year highs was supported by the Fed’s monetary restriction. Nevertheless, imagine that the Fed’s plan’s are not implemented and the inflation rate is increasing fast. If so, the bond rates will be up even higher. The central bank should control the PCE changes. That is its primary task. If the Fed funds rate is up to neutral level, then next, the Fed can adjust its monetary policy according to the environment: if the inflation rate is up – it should restrict its monetary policy, if the inflation rate is down, it should ease it. That is what New York Fed President John Williams was speaking about. According to him, the Fed’s policy will be not so clear in the near future, as it is now.

I, personally, believe that everyone should do their own business: the Fed – control the inflation rate; Donald Trump and his team – advance the laws that will develop the U.S. economic expansion. Experience shows, the US president’s comments haven’t influenced the market so much. On the short scope, the U.S. dollar was down, but it soon recovered. For EUR USD, it is more important now, how the situation in Italy will develop and if the turmoil won’t spread to the peripheral Euro-area countries. According to a wider spread between Italian and Spanish bond yields, investors are more or less comfortable for now.

Dynamics of Italy-Spain bond-yield spread

     

Source: Bloomberg

I still believe that the release of the U.S. inflation data and the easing of Italy’s political situation are the key drivers that can draw EUR USD rate outside the short-term trading range of 1.146-1.154.


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Price chart of EURUSD in real time mode

Euro Played the Joker

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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