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Yesterday's surge in optimism for the euro-dollar pair is due to several fundamental factors. Unexpectedly good reports ZEW supported the European currency, while the dollar was under pressure from the Federal Reserve Bank of New York, which for the first time in 10 years "poured" into the market a significant amount of 53 billion to maintain liquidity.
The combination of these factors returned the pair to the borders of the 11th figure, but the EUR/USD bulls failed again to overcome the resistance level of 1.1080 (Kijun-sen line on the daily chart), followed by a price pullback. Now, all the attention of market participants is riveted to the main event of the week - the Fed meeting. And the results of which we will learn tonight. Therefore, at the moment, "jumping into the departing train" is already quite risky since the Federal Reserve can substantially redraw the fundamental picture of the pair.
In general, the dynamics of the EUR/USD pair suggests that the bulls do not intend to give up. , Buyers were able to win back a 100-point decline in just one day, which was due to the statement by the European Commissioner for Trade on probable duties from the United States. The fear of a new trade war put strong pressure on the euro, but traders quickly switched to other fundamental factors. This is partly due to the reaction of the Americans to the statement of Cecilia Malmstrom. In fact, the US Permanent Representative to the EU, Gordon Sondlandrefuted her thesis that the White House refused to sit down at the negotiating table. He said that Brussels "needs to improve communication between the parties," especially in the light of large personnel shifts, in order to resolve trade issues.
The fact is that the leadership of key European institutions (the European Commission, the European Council, the ECB, and the foreign service) will change in October-November, which were appointed in the summer after the elections to the European Parliament. The representative of the White House expressed the hope that the new leadership would "extend a hand of friendship" to the US, sitting at the negotiating table. Donald Trump's ultimatum expires in October, but the rhetoric of the US Permanent Representative calmed the markets. apparently, the parties will still try to agree. Although this issue is a "time bomb", Washington will not meet the European allies, while Brussels will refuse to make unilateral concessions, according to most experts. In other words, the likelihood of a trade war between the US and the EU is still high. Traders just got a kind of respite, but this issue will again be on the agenda in October.
In the meantime, the market is worried about other issues. The main newsmaker of yesterday was the Federal Reserve Bank of New York, which conducted a round of one-day repos worth $ 53 billion for the first time since the financial crisis. As collateral, assets such as US government bonds, federal agency bonds, and mortgage-backed securities were identified. This decision was preceded by quite strong fluctuations in the repo rate. The interest rate on overnight loans yesterday reached record levels, jumping to 8% per annum. Due to the lack of liquidity, the effective rate rose to 2.25%, which is the upper "ceiling" of the Fed target range.
On the one hand, a sudden increase in the overnight rate on the repurchase of Treasury securities was provoked by a combination of temporary factors: the US authorities also tried to place a large number of debt obligations during the new issue. This fact coincided with the peak of corporate tax payments. On the other hand, such situations usually occur either at the end of the quarter or at the end of the month. As you know, around mid-September, this event worried traders. They started talking about a systemic problem in the market in the form of a decrease in bank reserves in the US. According to some analysts, it is now possible to talk about the likelihood that the Fed will introduce a repo mechanism on an ongoing basis, which will make the US currency less scarce and therefore less attractive.
But in general opinion, the liquidity shortage was indeed caused by temporary factors, and there is no talk of a systemic problem. Nevertheless, the market started talking about a certain vulnerability of the key borrowing market and this fact put background pressure on the greenback.
It is likely that Jerome Powell will comment on this situation tonight. Although investors expect answers from him to other questions. The most important concerns are the prospects of the monetary policy of the Fed. On the eve of the September meeting, some experts doubted even that the regulator would lower the interest rate today. The probability of this scenario is almost 35% despite the fact that it was zero a month ago. Therefore, the intrigue of today's meeting remains and this factor will determine the prospects for the American currency. In view of such an ambiguous fundamental background, it is now better to take a wait and see the position of the EUR/USD pair - at least until the announcement of the results of the Fed meeting.
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