The attempt of the "bears" of the pair USD/Euro to reach an important support level of 1.129 was easily suppressed by their opponents, which was apprehensible in the situation of the lull in the market due to the US Independence Day. The comments of the ECB representatives were not of much help either. Peter Praet noted that the European Central Bank has been efficiently implementing QE program, and the program is likely to be continued. One of the "hawks" of the Governing Council, Evald Novotny, said that the normalization of monetary policy will depend on the future economic development. He expects that interest rates will remain low for a long period. In general, it is clear that the Fed will act faster and efficiently than the ECB; however, the Fed can also have problems.
Last year the US Federal made significant amendments to the plan, increasing rates only once instead of the planned four times. In 2017 the Fed acts in accordance with to the outlined scenario. It was expected that the monetary policy would be tightened in March, June and September, and the process of winding up the balance sheet would start in December. The latter factor is regarded as less bullish for the USD than the increase in the federal funds rate, so the change in dates (reduction in the balance sheet in September, the rise in rates in December) has become one of the factors causing weakness in the USD index. The other two factors in my opinion are the disappointment about the implementation of the reflation policy of Donald Trump and the desire of the Central Banks-competitors of the Fed to start the process of monetary policy normalization.
Changes in the Central Banks’ balances
Source: Financial Times.
On the week, which ends on July 7, Rixbank joined the ECB, the Banks of Canada and England, declaring low chances of monetary expansion amid rising inflation and a reduction of external risks. It seems that the example of the Fed, which actions did not lead to an increase in the turbulence of financial markets, inspired other regulators.
Dynamics of asset purchases by Central Banks
Source: Financial Times.
May be the ECB will have the easier way than the Fed. The Fed needs to keep in mind the problems of the national debt ceiling and probability of the repetition of the history of four years ago with the government and slowdown in GDP. However, until September, the USD is unlikely to change dramatically. Moreover, the improvement of US macro-economic statistics and the pressure from the representatives of the Governing Council can provoke significant correction of EUR/USD.
Meanwhile, the market is waiting for the Minutes of the last FOMC meeting. Investors are interested in the inflation rate data and the start time of the balance winding up. Investors also wonder if Janet Yellen and her colleagues express concerns about excessive rally in the stock market. "Bears" of the pair EUR/ USD are ready to repeat attempt to reach support level of 1.134, and if their attempt will be successful, and the pair closes in the red zone for the fourth consecutive trading day, it will be the longest negative period for the Euro since early May.
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