EUR/USD surged as the central bank’s chairman decided not to repeat the same mistake again 

Did Jerome Powell follow Donald Trump’s advise or just admit his mistake? A real panic started in the financial markets the Fed’s chairman had said they the Fed'skey benchmark interest rate is near the neutral rate.The dollar has dropped, and S&P 500 is 2.3% up, showing the best performance for the past 8 months, and the 2-year Treasury yield, sensitive to the monetary policy, lost 10% within a few days. Did Powell decide to ask investors pardon in late autumn? Or, did it wan to prove that he is one of the guys and follows the market data, unlike Janet Yellen who preferred academic approach to the monetary policy?

According to FOMC estimate in September, the target range for the neutral interest rate is of 2.5%-3.5%. The current Fed’s rate is "just below" the range bottom border. That is why Powell’s words about the current funds rate being close to neutral, which results in neither faster nor slower economic expansion, can be interpreted as a pause after hiking the rate in December. After Powell’s speech traders see just one rate hike in 2019. Investors don’t expect the Fed’s funds rate increase in 2020.

Dynamics of the probability of Fed funds rate

  

Source: Bloomberg

There are more and talks that the FOMC will reduce its projection for major economic indices in December and focus on two tightening of the monetary policy in 2019, rather than two ones. Investors believe the US economy will slow down in 2019-2020 faster than the global, which is negative environment for the greenback.

However, it is quite risky to buy the euro now. Donald Trump uses any reason to justify 25% tariffs on the European car imports. Despite the truce with the EU, he is willing to impose the new tariffs within 12 minutes. Another fit of rage of the U.S. president was triggered by General Motors announcement that it would shutter five car plants and cut up to 15,000 jobs. If the export-lead Eurozone economy suffers from the US-China trade war and the uncertainty around Italy and Brexit, then how it and the stock indexes will respond the increase in the American tariffs? If they respond like Chinese stocks, the EURUSD bulls won’t benefit.

 

Dynamics of S&P 500 and Shanghai Composite

Source: Wall Street Journal

I, personally, have a feeling that the market was waiting for a signal from Jerome Powell to start selling the dollar again. However, traders are not going to sell the USD actively in the near future. The normalization process will slow down if the data are considerably worse. Until then, it is reasonable to expect the Fed’s rate hikes in March and in June. Based on this fact, I still believe that EURUSD won’t go on its rally unless the resistance at 1.147 is broken out.


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Price chart of EURUSD in real time mode

The Fed Begs Pardon

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