EUR/USD: Will Dollar Lose Its Crown?

Despite the mass sales of the U.S. dollar in late summer, EUR/USD bears are still strong.

It is better to regret something you do than to regret something you don’t do. The European Finance ministers and the central banks’ chiefs will discuss in Vienna whether the Euro-area economy is ready for increasing the interest rate. The ECB quitting quantitative easing program arouses concerns in some countries. Germany claims its real estate market to be overvalued by 35%, France expresses concerns about high level of corporate debt, and Italy claims that ECB will hit speculators if it ends QE. Even the subtlest signs of monetary normalization can become a serious problem for the financial markets, being in the state of boosted bubbles. Anyway, they will have to make the first step forward sooner or later.

According to the Centre for European Policy Studies, a higher interest rate shouldn’t suggest the mass market turmoil. On the contrary, the longer it is low, the more likely the markets are to get into a mess. Vulnerabilities accumulate, and the calm, as a rule, is followed by the storm. It is perfectly understood by both the Fed and the Bank of England, which have already started normalizing their monetary policies.Dynamics of central banks’ interest rates

Fed Funds, ECB Refinancing Rate, BoE Bank Rate

Source: Bloomberg

The talks about soon monetary restrictions by the ECB keep the euro afloat. The USA and the euro area are at different stages of economic cycle. The U.S. is close to its end, when increasing the interest rate doesn’t have the same effects as it used to do. The Eurozone is in its middle, when the most interesting is just beginning. There seems to be just a single problem. Nobody definitely knows whether the European economy will restore the growth pace of 2017, or whether the U.S. GDP growth will slow down.

First, the euro area needs to get rid of the trade war danger, the talks about it press down the European PMI, get consumers to save their money, rather than to spend it, which results in the slower economy growth. The EU officials know it and make a step towards the opponent: Brussels announced that it will increase the US beef imports in order to foster the trade truce that was agreed in July. Trump says that reduced tariffs on the U.S. cars are not enough to avoid trade war, and the EU understands his words.

Despite the mass sales of the U.S. dollar in late summer, it still looks to be the king. August turned out to be a real disaster for the emerging markets’ currencies; the record worst carry trade results alone are enough. And the EM make up the most of demand for the U.S. dollar because of the increasing during the recent years debt, and using the greenback as a funding currency to speculate on the price difference. Donald Trump is not going to end trade wars, and the talks about a pause in the Fed’s monetary normalization cycle are likely to be much exaggerated.

EUR/USD is still staying in the trading range of 1.15-1.185; and bears hope to break through the support zone at 1.158-1.1585 and draw the euro down towards its bottom border.

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