FOREX Fundamental analysis for EUR/USD on July 18, 2024
The attitude towards the US dollar is so negative that the optimism of the "bulls" on EURUSD does not decrease either due to statements by FOMC officials that the time for monetary easing has not yet come, or due to unexpectedly strong statistics on industrial production in the United States. But what about Donald Trump and his pro-inflation policies, which, theoretically, should force the Fed to keep rates high, strengthening the dollar? Alas, the rhetoric of the Republicans does not inspire optimism.
Donald Trump believes that the United States is at a disadvantage compared to China and Japan, as the dollar is too strong, and the yen and yuan are weak. His new partner, J.D. Vance, openly calls for a weakening of the dollar. According to him, devaluation is a terrible word, but in practice it means that exports become cheaper. Investors are in no hurry to sell EURUSD, fearing that the new president will put pressure on the Fed to lower rates, and may also use currency interventions to weaken the dollar.
Despite the statements of FOMC officials, the market remains confident in the September reduction in the federal funds rate. He expects three acts of monetary expansion in 2024, which, amid doubts that the ECB will hold at least two, pushes EURUSD quotes up. Indeed, after the data on American employment and inflation, there was a divergence in the monetary policy of the two leading central banks of the world, which plays into the hands of the euro.
It seems that inflation in the Eurozone is closer to the target 2% than in the United States, so why does the ECB not continue to reduce deposit rates? The problem is a strong labor market. Salaries are growing too fast, and low productivity does not force companies to shift their own costs to consumers. In the USA, the situation is different: the slowdown in wage growth against the background of high productivity makes it possible for companies not to raise prices, while maintaining high profits.
This means that in the Eurozone, the risks of a re-acceleration of inflation are higher than in the United States. The European Central Bank needs more time and data to make a decision on reducing the deposit rate. It is not surprising that the market expects only 1-2 acts of monetary easing from the ECB, while two or three are expected from the Fed. In short, the time of forex trading is not the calmest, since the further dynamics of assets depends on the positions of the world's main Central Banks, which themselves, it seems, cannot yet choose the only correct course of monetary policy
There is a high probability that Christine Lagarde and her colleagues will not only leave the cost of borrowing at 3.75% at the meeting on July 18, but also will not hint at a rate cut in September. If this happens, EURUSD will have the opportunity to rise higher, to 1.1. On the contrary, a hint of an early resumption of the cycle of monetary expansion may be a reason to take profits and roll back the main currency pair to 1.09.