An unpleasant surprise from US inflation and an ongoing squabble between Washington and Pyongyang returned the EUR/USD quotations to the top of the 17th figure. The big banks that made bets on the potential correction were clearly disappointed with the statistics on July producer prices. The index fell for the first time in almost a year on a monthly basis (-0.1%) and slowed to 1.9% in annual terms. Its dynamics are at odds with a similar indicator for China, alarming about the further subsidence of CPI and PCE, and reducing the likelihood of a continuation of the federal funds rate increase cycle in 2017. According to CME futures, the chances of a December monetary restriction are only 43%.
Dynamics of producer prices
Source: Financial Times.
The dollar fans were not pleased with the speech of the President of the Federal Reserve Bank of New York, William Dudley, who was expected to instill optimism and faith in implementing the plans of the Fed. Instead, he talked about the sluggish growth of wages against a background of a strong labor market. Are centrists starting to doubt the imminent restoration of American inflation? If so, we can hardly expect the third increase of the federal funds rate in 2017.
But three-quarters of the 62 experts in the Wall Street Journal survey, on the contrary, are confident that this will happen in December. Curiously, unlike during the last year events, they are now as optimistic about the trajectory of interest rate movements as the Fed. The median estimate of specialists at the end of 2017 was then at 1.23%, while the central bank forecasted 1.6%. As for the timing of the start of the balancing process, it seems that the issue has already been resolved - the overwhelming majority of experts vote for September. However, markets are still ignoring this factor due to extreme caution and sluggishness of the Federal Reserve.
Forecasts for the timing of the federal funds rate hike
Source: Wall Street Journal.
Pressure on the dollar creates an ongoing decline in the yield of instruments of the US debt market against the backdrop of an escalation of the conflict around North Korea and the flight of capital to safe haven assets. Pyongyang says it will publish a detailed plan for the attack on Guam in mid-August, and Donald Trump said that the recent promise to bring fire and fury was not tough enough. The media recommend looking at the behavior of US Secretary of Defense James Mattis. If he resigns, the order for an attack on North Korea is likely to have already arrived.
Geopolitics has inflated demand for the Japanese yen and the Swiss franc, while large-scale sales in USD/JPY and USD/CHF are helping to weaken the US dollar against other G10 currencies. As a result, EUR/USD quotes were able to test the upper limit of the range 1,169-1,177, however the first attack of the bulls was stopped. In such circumstances, even the expected data on the July CPI (+ 1.8% y / y) is unlikely to provide significant support to the fans of the US dollar. At best, the euro will fail to $1,1625-1,165, where the buyers will take over.
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