At first glance, the fall in the US dollar following the June FOMC meeting looks like an anomaly. The Fed raised its forecast for GDP by 2018 by 0.1 percentage point to 2.8%, inflation - by 0.2 pp to 2.1%, at the rate for federal funds - from 2.125% to 2.375%, lowered the estimate of unemployment by 0.2 pp to 3.6%. The futures market reacted with an increase in the probability of four monetary tightening to 56%, the yield of 10-year Treasury bonds is again ready to knock on the 3% mark. It can not be said that Jerome Powell's rhetoric turned out to be "dovish". He admired the state of the US economy and the labor market, spoke about the need for further normalization of monetary policy. What is the problem? Why, after a short growth, the dollar quickly lost its advantage and closed in the red zone?
The reference to the escalation of the trade conflict between the US and China looks unconvincing. Let Washington impose import duties on $50 billion from June 15, but the amount is so insignificant that it is unlikely to seriously slow down the global economy. The calculation of the Financial Times shows that tariffs will affect the countries involved in the conflict and will slow US GDP by hundredths of a percent within 5 years. Later on they will be forgotten. Yes, it is unpleasant, but the rules of the game will not change: China will continue to slow down in connection with the reorientation of the economy from investment to consumption, because of the large fiscal stimulus the US is going uphill. Sluggish response rates of the US debt market once again convinced that the reason for the weakness of the dollar should not be sought here. Where then?
In my opinion, he market is not set to buy the American currency. The Fed stopped the quantitative easing program in 2014, announcing it in 2013. Since late 2015, the Fed has raised rates. In 2013-2017, the USD index strengthened by almost 30% and reached a 13-year high. The revaluation of the Euro may go faster in terms of acceleration of inflation throughout the world under the influence of rising oil prices and the increase in the growth rate of wages in the euro area.
The dynamics of European salaries
Investors do not buy the dollar, reasonably assuming that its victories are history, sluggishly react to weak statistics on the currency bloc countries and actively buy up the euro in case of positive or signals about the normalization of the monetary policy of the ECB. Conclusion. The market before the meeting of the Governing Council was set to resume the upward trend in EUR/USD. In particular, the median estimate of the Bloomberg experts suggested that the main currency pair will meet the new year at the level of 1.22.
Alas, but the June meeting of the ECB became a cold shower for Euro fans. The central bank reported the completion of QE in December, but prepared an unpleasant surprise in the form of information about the retention rates, at least until the end of the summer of 2019, at current levels. It is quite possible that its position will change as the situation in the euro-zone economy improves, but now investors are actively getting rid of the single European currency.
Technically, the breakthrough by "bears" in EUR/USD of the lower border of the upward trading channel increases the risks of continuing the peak in the direction of 1.16-1.165.
EUR/USD, daily chart
