EUR / USD: a strong dollar, Trump hysteria and the intrigue of the July Fed meeting

The dollar index is at the peak of this year during the Asian session on Tuesday. It almost reached 98 points, reflecting the demand for US currency throughout the market. The EUR/USD pair managed to keep within the 11th figure but the position of the EUR/USD bulls is unstable. The bears could not impulsively push the support level of 1.1105 and enter the 10th figure, so they had to temporarily retreat. After which, the price showed a modest correctional increase. However, the dollar still maintains a strong position in the market. Therefore, a retest of the above support level is quite likely in the near future and possibly tomorrow, following the results of the July Fed meeting.


It is noteworthy that the American currency has acquired a kind of "immunity" to the attacks of Donald Trump. Earlier this week, the American president again lashed out at the Fed. In his twitter, he wrote that the European Central Bank and the People's Bank of China are preparing to pour money into the financial systems while lowering interest rates. Meanwhile, the Fed is inactive, ignoring the weak inflation rate. He also clarified that the Fed "will make a very small step" in the near future, apparently bearing in mind a reduction in the rate by 25 basis points. Despite such a sharp lunge in the direction of the American regulator, the foreign exchange market completely ignored it, and the dollar index continued to gain momentum. This is due to several factors. Firstly, Trump is in a rather helpless state regarding the personnel policy of the Fed.

Secondly, the latest US macroeconomic data allows the Fed not to resort to an aggressive easing of monetary policy. US inflation is indeed growing at a slow pace, but other economic indicators show mainly positive dynamics after a temporary recession. In addition, recent comments by economic adviser Larry Cudlow have lowered investor concerns about currency intervention. A senior official said the White House abandoned this idea despite a significant strengthening of the national currency.

If it is really so, we will know soon. The results of the July meeting of the Fed may provide additional support for the US currency, which is already at its maximum value anyway - and not only paired with the euro but paired with the pound. Further growth of the greenback will negatively affect both the export sector of the United States and inflationary processes. On the eve of the two-day meeting of the Fed, Trump called on members of the regulator to soften monetary policy "more significantly" (that is, to cut the rate immediately by 50 bp). Despite the fact that the basic scenario of today's meeting implies a reduction in the rate by 25 points, the market still worries that the Fed members will succumb to political pressure. In particular, Jerome Powell may hint at a further rate cut in the fall or in December. In that case, Greenback will suspend his rally and the EUR/USD pair will not only be able to return to the 12th figure but also to claim higher values (much will depend on the dynamics of European inflation).

In addition, one should not forget that another round of trade negotiations between Washington and Beijing is starting today. The initial optimism in this matter faded away and the parties were again bogged down in the negotiation process. The White House has already stated that one should not expect any practical results from this meeting (in particular, the signing of the deal), the US delegation will only hold regular consultations with the Chinese side. Here, it is worth recalling Trump's recent statement that China may decide to wait for the next US election "in the hope that it will be able to negotiate trade issues with another president." This suggests that the head of the White House is skeptical about the prospects of the negotiation process, and the likelihood of a full-fledged trade transaction in the near future is low. By the way, a little more than a year is left before the next US presidential election, while Trump is 5-10% lower than his main Democratic opponents. Therefore, the wait-and-see attitude of the Chinese in this context is fully justified.


Given the above factors, the intrigue of tomorrow's meeting remains. With 100% probability today, the Fed will reduce the interest rate to 2.25% but further actions by the regulator remain in question. If Powell is satisfied with the precautionary step and declares that he has been waiting, the dollar will increase its growth and together with the euro, it will go into the 10th figure. However, if the head of the Federal Reserve hints at the "continuation of the banquet" in September, the EUR/USD pair will return to the first resistance level of 1.1210, which is the middle line of the Bollinger Bands indicator on the daily chart.

The material has been provided by InstaForex Company -