The main currency pair is waiting for clues from the central bank.
The announcement of the results of the FOMC meeting, the presentation of the draft Italian budget and the release of data on European inflation for September – after a sluggish beginning to the week – the markets are waiting for an explosive ending. Each of the above events can seriously affect the alignment of forces in the EUR/USD. If the Fed is hawkish, if the euroskeptics don't take their cue from the EU, and lower the basic inflation in the eurozone is below 1%, the main currency pair will easily return to 1.15-1.16. On the contrary, Jerome Powell's dovish rhetoric, the leverage of the League and Five Star in Italy, and the growth of core CPI at 1.3-1.4% will throw the euro toward 1.19-1.2.
Given the strong second-third quarter statistics, the Fed is likely to raise its GDP forecast for 2018 from 2.8%. Nevertheless, the assessment of economic growth in 2019 can be reduced under the influence of trade wars. The probability of a change in the projected unemployment rate is high due to its current value of 3.9%. Investors will closely monitor the movement of Dot points. In June, eight FOMC representatives expected four federal funds rate increases, seven - three or less. Most likely, the doves will raise their estimates higher, which fully corresponds to the opinion of the futures market. It expects an 84% probability of monetary policy tightening in December. The growth of the index was the most important driver of the USD index rally, however, the implementation of the "Buy on rumors, sell on facts" principle forced speculators to take profits.
Dynamics Of The Fed Raising Rates
Source: Bloomberg.
Perhaps the most burning issue is changing the location of the Dot points to 2019. Despite the fact that Janet Yellen once called them "just the points in the chart", the markets are carefully watching the movements. Will the Fed consider that the economy ready to slow down under the influence of trade conflict will continue to need the previous rates of normalization? Or should one look for the key in inflation? The increase in import duties, for sure, will affect consumer prices, and this will force the central bank to act more aggressively.
It is extremely difficult to predict the reaction of the market. The EUR/USD knocked at 1.18 several times, which implies the presence of large sellers at 1.18-1.185 (the upper limit of the consolidation range 1.15-1.185). This is also evidenced by the analysis of positioning from Citi. In accordance with this, speculators continue to hold on to the dollar, while statistics from the CFTC says to the high risks of rapid unwinding of net short positions in the euro wandering near the maximum levels since the beginning of the year .
Dynamics Of EUR/USD And Positioning From Citi
Source: Bloomberg.
In my opinion, the Fed should be overly aggressive in order to push down the EUR/USD, while any sign of slowing of the normalization of monetary policy can play into the hands of the bulls. Investors accepted the trade wars as a long-lasting factor and return to the convergence theme in the monetary policy of the Fed and the ECB, which benefited the euro in the second half of 2017 - in early 2018.