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Markets are windy. Their mood changes every day. Is it any wonder that just as at the end of the first week of June, after disappointing statistics on US employment, investors dropped the US dollar, and at the end of the second week of summer, they bought it. The EUR/USD bulls understand that they have gone too far. First, a weak currency, such as the euro, cannot quickly restore the upward trend, and even in conditions when the trade war is not over. Secondly, CME derivatives look too self-confident about reducing the federal funds rate by 50 bp until the end of 2019. And the Fed can punish overconfidence.
Experts reminded the market that the Fed will not hurry with the adjustment of monetary policy. According to the consensus estimate of more than 100 Reuters respondents, the rate increase before the third quarter of 2020 should not be expected. Experts interviewed by the Wall Street Journal believe that by the end of this year, it will be at the level of 2.12% and by the end of next year – by 1.96%. That is, over the next 18 months, the rate will be reduced only by 25-50 bp. If the Fed does not signal monetary expansion in July, the US dollar is able to continue to grow.
No matter how much Donald Trump and his team would like the Central Bank to weaken its monetary policy, the Fed will act on the circumstances. Despite the disappointing statistics on American employment in May, the labor market still looks monolithic, and inflation is not going to go far from the target of 2%. GDP in the second quarter may slow down to 1.5-2% q/q, but we are talking about the return of the economy from abnormally high growth rates of almost 3% to normal. And in such circumstances, it is not necessary to hurry with the rate reduction.
The dynamics of the US inflation
The euro has made it clear that it has climbed too high. After Mario Draghi talked about the revival of the European QE, the governors of the banks of Finland and France Olli Rehn and Francois Villeroy de Galhau. Inflation expectations fell to record low values, and against this background, the ECB prefers to use "dovish" rhetoric. Another thing is that the potential for rate cuts and the list of suitable for the quantitative easing program are limited. However, this is unlikely to stop the regulator.
The key events of the week to June 21 are the FOMC meeting and the release of the eurozone business activity data for June (flash estimate). If purchasing managers are not afraid of the escalation of the trade conflict between the US and China, the PMI can go up, pulling EUR/USD. However, for the beginning, "bulls" need to pass the test of the Fed meeting. Caution Central Bank will make life easier for fans of the US dollar.
Technically, after reaching the target of 113% on the pattern "Shark" followed by a natural rollback in the direction of 38.2% and 50% of the CD wave in the transformation of "Shark" in 5-0. The retreat from support at 1.1225-1.123 will allow the bulls to go into a counterattack. On the contrary, the return of EUR/USD to the levels of 1.116 and 1.113 is a clear "bearish" signal.
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