EUR/USD: Fed Is A Shoulder For USD

The central bank may continue normalizing its monetary policy

A split inside the Fed and unexpected information about potential return of the Fed’s policy course if the uncertainty settles down provided a temporary support to the EUR/USD bears. The Federal Reserve is going to finish balance sheet normalization in 2019, which, in addition to a long pause in the hiking of the interest rate, is a bearish factor for the US dollar.

The minutes of the FOMC meeting in January showed that some Committee members believed that the US economy would remain strong enough for the Fed to afford it to hike the interest rate at least once more. Their opponents doubt that the inflation rate will increase. In this environment the regulator shouldn’t take any measures. In general, I have a feeling that the Federal Reserve is more concerned about whether the current level of the interest rate is high or not than about whether it should change it in future. However, the announcement that a gradual easing of the financial market turmoil and the improvement of global economy growth will allow the central bank not to speak about its policy dependence on the incoming data, which is a bullish factor for the greenback.

Dynamics Of The US Inflation And Unemployment

US Inflation And Unemployment

Source: Bloomberg

The EUR/USD bears are set back by Donald Trump’s announcement that March 1 is not a magic date, much can happen and the US won’t necessarily boost the tariffs on Chinese imports up to 25% from 10%. Beijing and Washington have outlined the framework for the future trade agreement, which is seen by investors as the biggest progress over the past seven months. On the other hand, Morgan Stanley (NYSE:MS) warns that the markets are overconfident in the trade war end, which presses the volatility down. In fact, there are still many unsettled issues; and the U.S., having solved the matter with China, may take on other opponents. In particular, the US president stated that if the EU won’t sign the deal with the U.S., the latter will rise the tariffs on European cars up to 25%. Xi Jinping faces a growing pressure inside the country, which gets Washington to be extremely cautious. If it goes too far, Beijing will refuse to negotiate further.

Dynamics Of Volatility Index

Stock Volatility

Source: Bloomberg

The EUR/USD bulls manged to fight back the attack of their opponents, encouraged by some dovish statements in the minutes of the FOMC January, and are willing to gain back the initiative. They may succeed if there are positive euro-area PMI data and no unpleasant surprises from the ECB. Bloomberg forecasts for the European PMI in February are roughly at the same level as the actual data in January. However, the growing optimism about the end of trade wars may draw the PMI higher. On the other hand, the ECB policy-makers speak about the LTRO and a change in the interest rate outlook more often. So, the major currency pair may ride a roller coaster on the dovish rhetoric of the Governing Council!

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