The dollar leads the competition

The euro could not stay for long in the region of 14-month highs and has hit the wave of profit-taking on longs after rumors circulated in the market that the ECB could follow the Fed in slowing down the process of normalizing monetary policy amid deteriorating financial conditions. The TD Bank believes that the level of 1.15 will be the ceiling of the EUR/USD in the short-term. Moreover, Credit Agricole is sure that the regulator will express dissatisfaction at the next meeting, The of the weighted trade rate of the euro was at 5% since April with strengthened risks of a slowdown in inflation for the next 6-12 months. This will allow the European Central Bank to postpone the reduction in the scale of quantitative easing.

Recently, several central banks have decided to follow the footsteps of the Federal Reserve in 2015 and 2016. Even the BoC raised their overnight rates. In this regard, it is not surprising that everyone continues to look towards what the Fed has to say, Janet Yellen's words about the readiness of the regulator to review the trajectory of the federal funds rate if inflation continues to slow were initially regarded as a "dovish" rhetoric. This forced investors to sell the dollar. Otherwise, if Yellen talked about the temporary nature of PCE growth rates and claimed that the Fed will act according to plan then the opposite would have happened. As a result, the likelihood of a monetary restriction went down and the EUR/USD quotes returned to the middle of the 14th figure.

Chart of the probability of monetary restrictions of the Fed in 2017


Source: Bloomberg

It is interesting that other central banks adhered to similar positions in the present day. Mario Draghi, like a blueprint, echoed the words of the head of the Federal Reserve on inflation. Nevertheless, after Yellen's speech before the Congress, the situation changed. The likely reason for changing rhetoric was the deterioration in financial conditions. The strengthening of the dollar and the growth of US Treasury bonds yields have become a catalyst for this process, However in Europe, due to the reevaluation of the euro and the rapid rise in rates of the debt market, financial conditions are deteriorating even faster compared to the US. Meanwhile, the ECB, following the example of the Fed, is unlikely to turn a blind eye.

Thus, if the "bears" for the EUR/USD currency pair managed to keep the quotes below the marke of 1.138. The risk of correction is in the direction of the base of the 13th figure and below the increase. Nevertheless, it should be understood that the uptrend remains in place. Statistics on Germany's foreign trade and industrial production in the euro area convinces the economy in Europe. The risks of the collapse of the currency bloc declined from 25% at the beginning of the year to 8.5% currently. In the United States, the situation is reversed. Macro statistics is mixed with the scandal surrounding the ties between Trump's son and Russia intensifying political risks.

Technically, the inability of the "bulls" to consolidate above the resistance at 1.1475 indicates their weakness. To develop a corrective movement for the "bears", it is necessary to storm the diagonal support in the form of a lower boundary of ascending trading channel.

EUR/USD daily chart


The material has been provided by InstaForex Company -