Exactly three years ago, in January 2015, the US Federal Reserve held its meeting, following which the euro / dollar pair collapsed for a month by a thousand points (from 1.2090 to 1.1095), continuing to fall to the fourth figure. The reason for such a significant reduction in prices was the "hawkish" rhetoric of regulator members, which allowed the market to expect a rate increase at the March meeting. As you remember, the rate was not raised in March 2015. The Fed could not decide to implement its intentions until December. Nevertheless, on market expectations, the dollar was in demand for the entire 15th year. The talk of a possible parity of EUR / USD did not abate long enough.
So it was three years ago.
Yesterday, the Fed, in fact, repeated the rhetoric of three years ago, ignoring even the fact of weak inflation. Moreover, the probability of an increase in the rate at the March meeting is already approaching 100%, and the chances of a triple increase within the current year have increased several folds. But the market actually ignored this fact. The euro / dollar pair first fell into the 23rd figure, but after an hour, the price growth recovered. The "hawkish" meeting of the Fed did not seem to have happened. But the regulator expressed the opinion that inflation this year will rise to the target level, thus neutralizing fears about the prospects for tightening monetary policy. But even this factor could not "wake" the dollar bulls. The greenback is still losing its position.
This state of affairs confirms the fact that the market has reoriented its priorities. The monetary policy of the United States is no longer the number 1 topic for traders of dollar pairs. Firstly, due to the smooth rate of increase. The target level of 2.8% will be achieved next year, after which the regulator will most likely take a wait-and-see attitude. Here, it is worth noting that the above-mentioned smooth rate of tightening of monetary policy will be sustained if the key macroeconomic indicators of the US continue to show growth. On the one hand, a number of experts place certain hopes in this aspect on tax reform. However, most currency strategists doubt that the reform will radically change the situation, especially against the background of the coming trade war.
And here we come to the main reason for the weakening of the dollar: The aggressive US foreign trade policy. However, Donald Trump himself says that he is only fighting for "honest rules of trade", while the rest of the world interprets his recent actions as elements of a cold trade war.
If we look at the current situation from this point of view, the weak dollar is more than ever needed by the White House, especially against the backdrop of a growing trade deficit. In his recent speech "On the state of affairs", the US president again stated that China is threatening the American economy, repeating its pre-election rhetoric. Official Beijing replied with restraint, asking the head of the White House to give up thinking in the style of the "cold war".
And although the Chinese are showing restraint, the market is still concerned about the growing pace of Trump's attacks on the Middle Kingdom. Another drop in the "cup of patience" of the PRC (a restriction on the import of steel) can provoke retaliation and then the cold trade war will pass into the stage of economic hostilities.
Many American political scientists warned last year that after the abolition of Obamacare and the adoption of the tax reform, Donald Trump will concentrate on foreign policy, or rather, on America's trade relations. And, judging by the rhetoric of the president in Davos and in the Congress, this forecast is justified.
This, in fact, explains the apathy of the market with respect to the prospects for the US monetary policy. The rate of increase in the rate of the Fed can change only in the direction of slowdown, and the announced plans are already largely laid in current prices. Also, one should not forget that the world's leading central banks also took a course to tighten the parameters of monetary and credit policy, so the "value" of this fundamental factor has largely declined.
Thus, the new benchmarks of the market determine the growth dynamics of the euro / dollar pair. It is obvious that the European Central Bank will be forced to apply retaliatory measures, primarily of a verbal nature. In January, Mario Draghi made a similar attempt, but it did not succeed.
The objective growth of the European economy narrows the maneuverability of pessimistic forecasts, and only low inflation allows the head of the ECB to soften the tone of his rhetoric. However, the growth of the basic indicator (up to 1%) and a slight slowdown in consumer prices (up to 1.3%) deprives Draghi and this "trump card" of verbal intervention.
In other words, the northern trend eurusd continues to be a priority. The first goal remains the same, 1.2538 (local maximum). The first support level is located at 1.2370 (the Tenkan-sen line on D1). A more powerful support level is located slightly lower at 1.2205 (at this price point the Kijun-sen line coincides with the middle line of the Bollinger Bands indicator on the daily chart). However, the final turn of the northern trend can be said only when the price leaves the region of 20 figures. At the moment, there are no fundamental prerequisites for implementing this scenario.
