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A strong economy is a strong currency! This principle of fundamental analysis works like a clock. No matter how many Donald Trump and the Fed acting on his orders try to drown the US dollar, they fail. The US looks better than the rest of the world and in such circumstances, the USD index is doomed to rally. Divergence in economic growth has always faithfully served any currency and the "American" is no exception to the rule.
After strong July retail sales statistics, Macroeconomic Advisers raised its forecast for US GDP for the third quarter from 1.7% to 2%. The leading indicator from the Atlanta Federal Reserve Bank signals that the American economy will expand by 2.2% in July-September. However, the US can also boast of unemployment near the lowest level over the past half-century and accelerated to 2.2% core inflation. Under normal conditions, the Fed simply would have to consider raising the rate on federal funds, which, on the contrary, has to be reduced. International risks are to blame which caused the inversion of the yield curve. She regularly correctly predicted all subsequent recessions from the mid-50s of the last century.
The United States clearly looks better than its main competitors, as evident not only by the growth of the economic index was surprising to its maximum level over the past few months. Germany economy contracted 0.1% in the second quarter, while Eurozone GDP recorded more than a modest 0.2% QoQ growth. So far, Chinese industrial production showed the worst performance since 2002. Trade wars are not only painful in China but also oriented towards China export to the economy of the currency block led by Germany.
The dynamics of the US economic surprises index
As a result, the ECB is forced to weaken monetary policy not modestly, but very seriously. Markets expect a reduction in the deposit rate from -0.4% to -0.5% and the reanimation of a program of quantitative easing at the September meeting of the Governing Council, which has sunk into oblivion, including the purchase of bonds by €40-50 billion per month. But in fact, they can receive much more. For example, Mario Draghi and his colleagues can lower the rate by 0.2 pp and start buying other assets along with bonds.
The main events of the week by August 23 will be the publication of the minutes of the July meetings of the Fed and the ECB. According to their results, the federal funds rate was reduced by 0.25 percentage points and Super Mario gave a signal to resume QE. Theoretically, the further dynamics of the EUR/USD pair will depend on whose rhetoric seems more "dovish" to the market. Nevertheless, the principle of "strong economy - strong currency" has not been canceled. Hence, the dollar is quite capable of continuing the attack on the camps of major world currencies.
The technical inability of the euro bulls to keep quotes within the consolidation range of 1.11-1.14 is a sign of their weakness. If the bears manage to rewrite the August minimum and activate the AB = CD pattern, the risks of fulfilling its target will increase by 161.8%.
EUR / USD Daily chart
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