The euro consolidated above figure 14 base due to Mario Draghi comments, expectations the Fed’s dovish rhetoric and the hopes for the progress in the US-China trade talks. The ECB president has noted that, although the euro-area economy seems to be weaker than it could be expected, it doesn’t guarantee an additional monetary stimulus. The matter is what unforeseen circumstances can get the ECB to do it. The Governing Council still doesn’t see such unforeseen circumstances. Yes, the weak foreign demand and some industrial factors press the GDP growth down, but the super Mario is still confident in the strength of the currency block economy.
Remember, the rumours about the launch of the long term refinancing operation (LTRO) and the suggested downward shift in the balance of risk at the ECB meeting in January triggered the EUR/USD sales. If Mario Draghi rejects the idea of monetary stimulus extension, and the central bank, having cut the forecasts, again speak about the balance of risks, everything is not that bad, in fact. It is obviously not good, but one shouldn’t panic. Investors can safely focus on other topics. For example, it is a decline in the US economic expansion and the pause in the Fed’s monetary normalization.
According to the Congressional Budget Office, the 35-day government shutdown will cost the US economy $3 billion in the fourth quarter, 2018, and $8 billion in the first quarter, 20019. A part of the losses will be covered by the GDP growth during the rest of the year, but $3 billion in economic activity is permanently lost. The US GDP rate will be at 2.1% in the January-March period, though it could be at 2.5% YoY. Morgan Stanley (NYSE:MS) has lowered its forecast down to 1.7% from 2.5% for the first quarter and increased up to 2.1% YoY from 1.8% YoY in the second quarter.
Dynamics Of The US GDP Rate
Source: Wall Street Journal
The Fed is willing to take a long break in normalizing its monetary policy in order to avoid worsening the situation and the story with stock indices crash. Furthermore, it is not only about the federal funds rate, but about the balance sheet as well. Investors discuss the idea that the combination of massive bond issuance by the Treasury Department and the end of the income reinvesting by the central bank takes away the liquidity from other markets and increases volatility.
Despite the obvious contradictions in their positions, the Treasury Secretary Steven Mnuchin expects a considerable progress in the US-China negotiations. Beijing is willing to buy more agricultural products from the USA, but it is not going to change the system of state-owned enterprises. There is an opinion inside the country that Beijing has to solve the problems that do not exist. There is also a controversial issue of regular monitoring of the agreement provisions reached, that is insisted on by the USA. After all, according to Invesco, the markets will take the news about the trade talks positively, as long as they go on negotiating. In this environment, the euro could potentially continue its rally up to $1.146-$1.1485, at least.