Last week, in just a few days, the euro-dollar pair lost almost 150 points, falling from the middle of the 13th figure to the mark of 1.1209. Judging by the pace of Friday's decline, the eur/usd bears clearly intended to enter the 11th figure, but they simply did not have enough time, due to the completion of the five-day trading period. However, despite the rapid growth of the US currency, the further rally of the greenback is questionable, due to its vulnerability. In my opinion, the revaluation of the dollar was a bit premature, so traders should be wary of this price movement.
By and large, the Friday impulse was due to the release of two macroeconomic reports: the state of industrial production in the United States and the dynamics of retail sales. First of all, we were surprised at the growth rate of industrial production: the figure unexpectedly rose by 0.4% on a monthly basis, after a strong decline in the previous reporting period. The index exceeded the forecast values (+0.2%) and reached a seven-month high, after the strongest decline since February 2017. Related components (in particular, the capacity utilization rate and production indicator in the manufacturing sector) also showed a positive trend. A more modest growth was recorded for retail sales. In general, the release came out at the level of predicted values, whereas the figure with regard to car sales was even weaker than expectations (0.5% instead of the predicted 0.7%). But in general, retail sales in the United States shown a positive trend, thus confirming the growth in consumer activity of Americans.
These releases, plus the so-called "Friday factor" (many traders took profits on the eve of the weekend) played a key role in the recovery of the US currency: the dollar index updated this month's high, rising to 97.54. The market suddenly doubted that the Fed would take a dovish position at the June meeting (the results of which will be announced as early as June 19), although the probability of a rate cut by the end of the summer is already almost 70%. Such discord allowed the dollar to strengthen against a basket of major currencies, defining new price horizons.
Still, some experts ask themselves: are the above releases capable of drastically changing the current situation in the context of the prospects for the Fed's monetary policy? In particular, TD Securities analysts warn that members of the US regulator are still announcing a rate cut — albeit with an "open" date, without the designation of the July meeting. According to experts, the Fed is likely to set the stage for a rate cut in the foreseeable future by next week. The decline in the labor market and the slowdown in inflation against the background of the escalation of the US-China trade war are the main fundamental factors that will determine the tone of the rhetoric of members of the Federal Reserve. In this context, growth in industrial production and a very modest growth in retail sales will play a secondary role.
On the other hand, we should not forget that the June Fed meeting will be held before the G-20 summit (June 28-29). Trump's contradictory signals put many currency strategists at a standstill: at first he threatened to impose billions in taxes on China if Beijing didn't make a deal with Washington, but then "replaced anger with mercy," saying the agreement was inevitable. "Sooner or later they will do it anyway," Trump said in an interview with an American television channel. How the White House will behave directly in front of the G20 is an open question. But almost all economists and political analysts agree that the G-20 summit will be a turning point regarding the future relationship between the United States and China. Given this factor, it is unlikely that the Fed will be too frank about its plans for the future. In my opinion, the median (point) forecast for the current year will remain the same (i.e., wait and see until the end of 2019), and the average forecast for the next year will be lowered.
Thus, the dollar's vulnerability still persists. The Fed can ignore the successful releases of the past week and focus on more important aspects - both macroeconomic and political. The regulator is unlikely to announce a rate cut at the July meeting, but it may well "open the door" for such a decision with the help of extremely mild rhetoric. In this case, the optimism of dollar bulls will be offset. And including paired with the euro, since the ECB, despite numerous rumors, still maintains a wait-and-see position and (so far) does not follow the path of easing monetary policy. All this suggests that the support level of 1.1210 can resist - if dollar bulls doubt their strength on the eve of the June meeting. The next level of support for eur/usd is in the area of annual lows (1.1105), so it is important for the bulls of the pair to hold current positions. But overall, short positions for the pair still look risky, given the unreliability of fundamental factors.
