Janet Yellen failed to find convincing reasons to prove why the Fed should continue to raise the rates, despite sluggish inflation. This fact along with the uttered word "impeachment" has caused retreat of the bears in the pair EUR / USD. Democrats has brought up an initiative in Congress to dismiss Donald Trump from his post because he created obstacles in the investigation of possible interference of Russia in the presidential elections in the United States. Nothing is clear so far, however, the phrase "impeachment to the president" has forced investors to turn their attention to the safe-haven assets.
The increase in political risks in the United States puts strong pressure on the USD, while the situation in Europe is peaceful. According to the Sentix index, the probability that one of the countries may leave the EU is 8.5% against 25% at the beginning of the year. Problems in the US exist not only in politics, but also in the economy. The Fed's beige book shows that in June, US GDP has increased at a rate that can be described "between the low and the moderate": situation in the labor market remained positive, while the increase in price was modest. At the same time, economic indicators in Eurozone continue to increase. In May industrial production demonstrated the best dynamics since November 2016.
Dynamics of industrial production of Eurozone
Source: Financial Times.
Janet Yellen expressed hope that a strong labor market would ultimately bring inflation to the target level. At the same time she also said that the continuation of the slow price movement would allow the Fed to improve the process of monetary policy normalization. It is unlikely that the federal funds rate will be raised until December, and the ECB will announce about the QE curtailment of in September.
Situation in politics and economy, as well as decisions by the Central Banks have shifted investors’ attention to the Euro, which is clearly seen in the dynamics of net positions in the futures market. But the European currency has the second string to bow: since 2009, the share of the Euro in reserves has decreased from 29% to 20%, and the share of euro-denominated international bonds fell from 29.3% in 2004 to 22% at the end of last year. Why not return everything to its original positions?
Dynamics of speculative net positions on the euro
Source: Wall Street Journal.
The changes in Forex force the large banks to reconsider their forecasts. If, at the beginning of the year, Deutsche Bank and Morgan Stanle expected the parity in the pair EUR/USD, now they predict that the pair will be at the levels of 1.16 and 1.18 by the end of 2017. The HSBC has changed the forecast from 1.1 to 1.2. According to Credit Agricole, the movement of the bulls will accelerate until the ECB begins to worry about the excessively fast rise in Euro, which may happen already at the next meeting of the Governing Council.
Nomura is a white crow against the others. When, at the beginning of the year, most banks recommended to sell the pair EUR / USD, Nomura analysts, who believed in the victory of Emmanuel Macron in the French presidential election, suggested that investors should buy the Euro. Now Nomura advises investors to fix profits and not act as wolves, which are always hungry.
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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.