Fed’s hints at aggressive monetary restrictions encouraged EURUSD bears to draw the rate below 1.15 The Fed’s willingness to raise the rate aggressively and the reluctance of the U.S. Treasury Department to label China a currency manipulator pushed the U.S. dollar up. The greenback has marked the best two-week rally amid the statements of some FOMC representatives that the monetary policy can become restricting for some time. The central bank is willing to hike the interest rate higher than its long-term projected level if the inflation is too hot ant the risks of financial excesses substantially increase. Such rhetoric might suggest that the financial regulator will raise the fed funds rate for four times, rather than for three ones, in 2019.Divergence if the ECB and the Fed monetary policies is still working to EURUSD bears’ advantage; especially since investors are not as confident that the U.S. dollar will be getting weaker, affected by the U.S. twin deficit, as the used to do. Experience proves that the tax reduction by Ronald Reagan resulted in wider foreign deficit; however, the greenback was 32% up during the 1981-1986 period. It mostly resulted in the rival currencies’ weakness; however, at present, they don’t look strong too. At that time, the USA wasn’t yet a net lender as it is now; but, taking into account the U.S. dollar’s dominance in global economy, I can assume that the U.S. twin deficit is going to be a less important factor than, for example, the differences in the monetary policies, held by the ECB and the Fed.Dynamics of USD and U.S. twin deficit
Source: Financial TimesEUR USD bears were also supported by the U.S. Treasury unwillingness to label China a currency manipulator. Although it was noted in the report that the yuan weakening can increase the China’s foreign trade surplus, the U.S. officials admitted that the interventions of Beijing in Forex had been rather limited. According the Secretary of the U.S. Department of treasury Steven Mnuchin, the strongest concerns are caused by the lack of currency transparency of PBOC and the recent yuan devaluation. China, along with Germany, India, Japan, South Korea and Switzerland, has remained on the formal monitoring list. Before the U.S. Treasury half-year report had been released, investors were discussing the idea that China’s currency manipulator label could fuel the turmoil in the financial markets. Their calm might be considered as a bullish factor for the greenback. Otherwise, the foreigners’ escape from the U.S. stock indexes would result in further sales of the U.S. dollar.The uncertainty around the decision of the European Commission about the Italy’s budget with the deficit of 2.4% of GDP during the next ten days will put pressure on the dollar. At the same time, the market is still ignoring the factor of the U.S. mid-term elections, which are getting closer. To drive the EUR/USD lower, bears need to storm the support at 1.145 and steadily consolidate the price below. If they fail to keep the euro below the level, bulls will have a chance to go ahead.