In the foreign exchange market, there is a discussion of the possibility of a fall in the single European currency to parity with the US dollar. Investors, who are evaluating the prospects for starting a new stimulus program, admit this probability.
Indeed, watching everything that happens, I want to ask if such a probability really exist or will it all end at best near the minimum values that were at the beginning of 2017?
Of course, evaluating such prospects, one should also consider the state of the American economy, Fed's view of monetary policy. the increased risks of Donald Trump's impeachment, and the situation surrounding the US global trade war with China. That is, aside from other events such as the economic situation in the eurozone, the ECB monetary policy, the Brexit crisis, as well as the consequences of a rash migrant policy, primarily of the German authorities.
Analyzing the big picture in the eurozone or wide Europe, we note that the slowdown in the region's economy against the backdrop of the uncertainty of possible losses from Britain's exit from the EU has already forced the ECB to decide on the beginning of new stimulus measures from October 1 of this year. The program will affect the purchase of government bonds, corporate securities, as well as pumping the financial system with liquidity. In addition, there is the likelihood of an even deeper reduction in rates on negative territory. In fact, we can say that Europe has taken almost all measures that are possible in this situation but what about the US?
According to the latest release on Thursday, the growth of the American national economy is 2.0%. Inflation is at 1.7% and the unemployment rate is at 3.7%, which is the lowest over the past 50 years. In our opinion, if it had not been for the start of the US-Chinese trade war, the Fed would not have started lowering interest rates. This decrease is due to the desire of the regulator to insure itself against a possible negative lack of trade agreements. Yes, the bank began to conduct repos to support liquidity in the financial system. While there is a discussion about whether to continue actively reduce the cost of borrowing or not, the dollar is doing pretty well. Another important point, despite the low yield of government bonds in the United States characteristic of economically developed countries, they are higher than, for example, the German "bundes."
So, is there a chance that the eurodollar pair will fall to the level of parity or not? We believe that while the Fed will discuss economic growth in America, it will remain at an acceptable level of 2.0% amid low unemployment and inflation near the current level. The pair will continue to fall to the minimum values of 2017. But whether there will be parity in the future or not, it will largely depend on the prospects for concluding a new trade agreement between Washington and Beijing, the state of the American and European economies, as well as other reasons some of which we mentioned above. Yet, overall, we assess the likely trend of the pair as negative in the short term.
Forecast of the day:
The EUR/USD pair is consolidating above the level of 1.0905. Overcoming it against the background of the expected positive data on basic orders for durable goods, as well as the basic price index for personal consumption in the US, will lead to a continued fall in prices to 1.0830.
The GBP/USD pair remains under pressure above 1.2285. We believe that it will continue to fall in the wake of the government crisis in Britain and the impasse in negotiations with the EU generated by Brexit. A breakthrough at the level of 1.2285 will lead to a decrease in prices to 1.2200 and an additional incentive to reduce will be positive data on the US economy.
