28.06.201901:57 Forex Analysis & Reviews: EUR / USD: rumors of the G20, German inflation and US GDP

On the eve of the G-20 summit, traders are noticeably nervous when responding to conflicting rumors. The stakes are really high - according to the results of the G20, the trade war will either break out with a new force, or end with the signing of a large-scale transaction. In the first case, the superpowers will provoke a "domino effect" by launching a mechanism for mitigating the parameters of monetary policy by the leading central banks of the world. First of all, we are talking about the Fed and (possibly) the ECB. And if the probability of a rate cut is estimated at 100% (especially with the negative outcome of the negotiations between Trump and Xi Jinping), then the situation with the European regulator is not that clear. Therefore, any rumors about the continuing differences between Beijing and Washington are playing against the dollar and vice versa. The positive news in this context provides quite strong support for the US currency.

Today's price fluctuations of EUR/USD eloquently confirmed this pattern. During the Asian session on Thursday, the price dropped to the middle of the 13th figure amid rumors that the United States and China reached a "preliminary truce" in the trade war ahead of the summit and the meeting of the leaders of these countries. This information made it possible to revise forecasts for the future actions of the Fed, at least about the extent of monetary policy easing. The dollar index shot upwards, changing the configuration in the major dollar pairs. However, at the start of the European session, an official comment appeared from the spokesperson for the Ministry of Foreign Affairs of China. He stated that the Chinese government "does not know anything" about any trade truce allegedly concluded by the United States and the People's Republic of China. This remark became a "cold shower" for dollar bulls, which made the bulls of EUR/USD to went in the direction of the 14th figure.

In general, despite such fluctuations, the pair is within the price range limited by 1.1290 marks (Tenkan-sen line on the daily chart) and 1.1420 (the upper line of the BB indicator on the same time frame). Traders are unlikely to allow themselves to go beyond this price range before the announcement of the outcome of the G20 summit, or to be more precise, before the announcement of the outcome of the negotiations between the leaders of the United States and China.

However, according to a number of currency strategists, the dollar will still remain under pressure in the medium term, regardless of the preliminary agreements between Trump and Jinping. For two years, the US currency has consistently strengthened, retaining its position thanks to two pillars: first, this is Trump's fiscal stimulus policy, and second, the Fed's tight monetary policy. At the moment, the positive effect of fiscal incentives has almost dried up, after which inflation indicators began to slowly but surely slide down. On the other hand, the negative consequences of the trade war with China have become more clearly manifested recently. According to Moody's, the US GDP will only grow to 2.3% (the previous forecast is 2.5%) this year, whereas in 2020, it is expected to grow to 1.7%. In general, if the States impose 25 percent duties on the remaining Chinese products worth $ 300 billion (and Beijing responds with mirror measures), then global GDP growth will drop to 2.7% and, accordingly, slacken the US economy. That is why the dollar is so sensitive to preliminary rumors about the prospects for US-China relations.

The European currency, in turn, received support from macroeconomic statistics today. German inflation surprised by quite strong figures, which became a precursor to the growth of European inflation (release is scheduled for tomorrow). Thus, in monthly terms, the indicator moved away from the lows of the year and rose to 0.3% (forecast - 0.2%). On an annualized basis, a positive trend was also recorded: the index reached 1.6%, while the growth forecast was up to 1.4%. The regional reports of the German CPI reflected a general improvement in inflation rates in annual terms.

This result is a positive signal for the ECB, since the inflation forecast remains unchanged as of today - at least for the "locomotive of the European economy" - Germany. The market reacted quite restrained to this release: the approaching summit does not allow traders to focus on other fundamental factors. Another release that was already published in the USA was also ignored. This is a final assessment of the growth of the American economy in the first quarter of this year. The price component of GDP was slightly revised upwards (from 0.8% to 0.9%), but this fact was ignored by traders. Firstly, even with the revision of this indicator, it still remains at fairly low values (the weakest growth rate since the first quarter of 2016), and secondly, other inflation indicators also leave much to be desired. Therefore, the minimal improvement in the GDP Price Index did not change the general mood of the market.

Thus, the market froze in anticipation of the main event of the month, and maybe a year. All other fundamental factors play a secondary role. Judging by the reaction of the market to preliminary rumors about the "peace" of China and the United States, we will expect quite strong volatility in the coming days. The movement vector of the pair EUR/USD will depend on the outcome of the negotiations of the leaders of the superpowers. If the parties can make a deal (or issue a kind of "protocol of intent"), then the dollar will receive strong support and, possibly, resume rally across the market. Otherwise, the pair will finally consolidates in the area of the 14th figure, occupying a new price niche.