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Exchange Rates 11.07.2019 analysis

The focus of traders is the speech of the head of the Federal Reserve System (FRS) of the US Jerome Powell in Congress and the publication of the minutes of the June meeting of the FOMC. It is assumed that they will shed light on the way in which the Federal Reserve's next meeting, scheduled for the end of July, will take place.

The EUR/USD pair is trading near the 1.1220 mark in anticipation of signals from the Fed.

Since the June data on the US labor market turned out to be stronger than previously expected, the need to mitigate the Fed's monetary rate has slightly dropped, and record high quotes on the American stock market, which received support from cheap money, are beginning to put pressure on investors, who have recently, surprisingly , rejoiced at weak US economic data and grieved because of signs of recovery of the country's economy.

"Are we really in a world turned upside down, where the good state of the US economy is the worst thing in the world for markets, since it raises doubts that the Fed will continue to generously distribute money?" Said John Hardy, chief currency strategist Saxo Bank.

Last month, the Fed hinted that it was prepared to lower the rate in order to support economic growth in the United States in the context of trade wars.

The derivatives market still assesses the probability of a rate cut at the July FOMC meeting at 100%.

Speech by the Fed Chairman in Congress

This week, Fed Chairman Jerome Powell should signal to the market what the regulator intends to do in the future. It is unclear whether the US central bank will act or is still not sure and will continue to monitor the incoming data.

Today, the Fed chairman will deliver a semi-annual report on monetary policy in the Financial Services Committee of the House of Representatives, and tomorrow in the Senate Banking Committee.

Most likely, during the speeches in Congress, J. Powell will leave the door wide open to lower the federal funds rate, although the latest release on the US labor market has weakened arguments in favor of haste with monetary easing.

It is possible that the head of the Fed may repeat the wording from the June statement and that the regulator will act accordingly to support economic growth in the country. This may strengthen the market in the opinion that the US central bank will lower the interest rate at the next meeting on July 30-31.

FOMC Minutes

The minutes from the last FOMC meeting will be released today. This publication is important in order to determine the course of the Fed's current policy and its future prospects. The minutes will contain clarifying details regarding the outcome of the June Fed meeting and can demonstrate how "soft" the regulator's position is now. The fears of the latter are primarily related to international trade. Although Washington and Beijing at the G20 summit agreed to restart trade negotiations, only time will tell whether the parties can make real progress.

It is expected that the "soft" tone of the minutes will have a negative impact on the US dollar, while the "hard" rhetoric of the Fed's leadership regarding monetary policy prospects will push the greenback to further growth, including in relation to the euro.

EUR/USD outlook

A regular meeting of the Federal Reserve is set to take place at the end of July, according to the results of which market participants are waiting for a reduction in the federal funds rate by 0.25%. At the same time, analysts seriously fear that if the Fed does not lower the rate, the head of the White House, Donald Trump, may proceed to active actions aimed at weakening the US currency.

"Can frustration with the Fed's policies encourage the US president to take matters into his own hands and weaken the dollar? If the ECB lowers rates at the end of July or starts a new round of quantitative easing in September, and this will increase the pressure on the EUR/USD pair, Washington could potentially react. Given the threat of currency intervention, we assume that the dollar will reach highs this summer. Therefore, we maintain our forecast for the EUR/USD pair at 1.15 for the end of the year," noted currency strategists at ING.

Bipan Rai, North America Head of FX Strategy at CIBC, noted that this scenario is not basic for the bank, but with such a development, the US Treasury may require the Fed to liquidate its balance in order to free up more dollars for market intervention.

"This may have a long downward pressure on the greenback, given the incredible size of the Fed's balance sheet," the analyst said.

Meanwhile, Barclays analysts believe that the decline in the dollar can be forgotten, while the euro, by contrast, looks even more vulnerable.

"Although, in general, the latest statistics on the United States were mixed, they showed that the positive momentum persists, particularly in the labor market. Under these conditions, the Fed may stick to "soft" rhetoric, however, the regulator definitely has no reason to rush to the actual reduction in rates. At the same time, signals from the eurozone turned out to be negative. A recession combined with low inflation in the region will force the ECB to go for additional easing, although it will not be easy. Therefore, we decided to lower the outlook for EUR/USD at the end of the third quarter from 1.14 to 1.12, and at the end of the year from 1.11 to 1.10," Barclays said.

Performed by V Isakov,
Analytical expert
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