EUR/USD: Has The Dollar Put Itself In A Cage?

Economic expansion in the United States was strong enough to merit another increase in the federal fund’s rate, but the precarious position of global financial markets and the slowdown in GDPs in China and the Eurozone make the prospects for the Fed’s monetary policy normalizing in 2019 look gloomy. The Central Bank faces a flurry of criticism not only from the president and his team, but also from retail investors. According to a Wells Fargo (NYSE:WFC) survey, 61% of them would like the rates to stay the same. Only 11% of respondents believe that the American economy is experiencing a boom, 50% believe that it is functioning on a solid basis and 39% call this basis shaky. When stones are constantly thrown at you, you have to react.

In anticipation of the last FOMC meeting in 2018, at which, according to the derivatives market, monetary policy will be tightened, another piece of criticism comes from the White House. Donald Trump called the Fed’s actions devoid of logic. While the States live with little or no inflation, Paris is on fire, and China is on the way down. Instead of enjoying the victory, the central bank is going to raise the rates. Presidential Trade Advisor Peter Navarro has called the Federal Reserve crazy. If they say that they will be guided by incoming data, and instead plan three acts of monetary restriction in 2019, something is not okay.

Likelihood of a Fed rate hike in December

Source: Bloomberg.

I must admitt that the U.S. statistics in recent days were mixed. The labor market, retail sales and consumer spending are strong, but the real estate market and the manufacturing industry are experiencing problems, and inflation is slowing. Let’s be objective, the Fed, with its phrase about “further gradual” increase in the cost of borrowing, has put itself in a cage. The markets are used to understanding this phrase as the increase in the federal funds rate once a quarter. The language, like the FOMC forecasts, need to be adjusted, which will be perceived as dovish rhetoric and will put pressure on the U.S. dollar.

The weakness of the greenback can be a reason for the growth of interest in the euro, which is in a bad enough situation as it is. The devaluation and truce in the U.S. and Chinese trade wars will lend a helping hand to the export-oriented economy of the Eurozone, and the willingness of Emmanuel Macron and euro skeptics in Italy to make concessions will reduce political risks. Rome announced its intention to reduce the budget deficit from 2.4% to 2% of GDP in order not to fall under the punitive hand of the EU. If Britain also remains in the European Union, then the EUR/USD bulls will rush to attack. Even more so as they are warned by the median forecast of Bloomberg experts at 1.2 by the end of 2019.

The main currency pair continues to consolidate in the range of 1.1265-1.1445 and, as I expected, as long as its lower limit stands as an impregnable fortress, euro fans will find the strength to retaliate. Let’s wait for the results of the FOMC meeting.

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