24 hour timeframe
The speech of Federal Reserve Chairman Jerome Powell on Friday was the final chord of the week, which was rather rich in macroeconomic events. As we said in previous articles, traders ignored all reports from the European Union and the United States on Friday. Even one of the most significant NonFarm Payrolls reports with a real value much lower than the forecast did not cause traders' reaction. What is it? Reluctance of traders to change the "bearish" mood to "bullish"? The disbelief of bulls in the ability of the euro to rise in price against the dollar? The currency market's disbelief in the Fed's key interest rate cut in September, or high concerns about easing the already ultra-soft monetary policy of the European Union? In part, traders could get an answer on Friday night. Federal Reserve Chairman Jerome Powell spoke in Zurich and touched on US monetary policy. Powell's speech began with words about "good performance in the US economy." However, Powell notes that high risks of a global recession remain, a slowdown in global economic growth, and uncertainty over trade wars and low inflation. GDP growth in 2019 is expected to reach 2% - 2.5%. Powell also touched on the slowdown in the index of business activity in the US manufacturing sector (recall that the ISM index this week fell to 49.1 points, indicating a decline in the industry). He said that so far the decline in business activity in production has been offset by the larger services sector and the high level of business activity in it (which is confirmed by the same ISM index for the services sector, which rose to 56.4). At the end of his speech, Powell said that he expects moderate growth in the global economy and the US economy. Thus, the head of the Fed in no way clarified the situation with a possible second consecutive easing of monetary policy at a regulator meeting on September 17-18. However, analysts expect a rate cut in September with a 90% probability. Mostly thanks to James Bullard, a member of the Fed's monetary committee, who spoke earlier on this issue. But his colleague, the head of the Boston Federal Reserve, Eric Rosengren, on the contrary, believes that the US economy is in good condition and there is no need to reduce the rate.
We believe that the probability of a rate cut in September is not 90%, but slightly less, say 70%. An important role in this matter is played by the constant pressure of US President Donald Trump on the Fed and Jerome Powell. In addition, in earlier reviews, we assumed that Trump could put pressure on other members of the monetary committee, fully aware that not only Powell decides to change or not change monetary policy. Thus, the rhetoric of James Bullard that the rate can be immediately trimmed by 0.5%, can be considered as a "deflection" under Donald Trump, who needs to reduce the rate like air.
We mentioned more than once as to why Trump would lower the rate. Firstly, competitors, the United States, China, the European Union, have an influence on their central banks and, accordingly, can artificially depreciate their national currencies in order to gain an advantage in trade relations with the United States and offset the damage from duties imposed by Trump. Secondly, for a country that eternally lives in debt, the issue of servicing this debt is an acute issue. The more expensive the dollar, the more difficult it is to service the debt. For example, Bloomberg analysts conducted a study. They suggested what would happen to the US economy if the opportunity to build up debts disconnected and America would have to live within its means. The results of the study turned out to be very disappointing, but predictable. The country's GDP per capita in this case will go into the negative zone. It is clear that the GDP indicator itself cannot be negative, since it expresses the total value of goods and services produced and rendered in the country. However, the fact that the GDP was negative in the study excellently shows how much the US economy is dependent on debt.
In addition, Trump's policy is to return the production facilities of companies that have chosen "cheaper countries" for the production of their goods to the United States. This will provide an opportunity to further develop the labor market and receive even more tax revenues. However, how to do this, if the dollar is very expensive (and constantly rising in price), it is very expensive to produce goods in the US, so these goods cost a fortune abroad. The answer is simple: the US dollar must be cheap in order to be able to produce goods in the United States, and easily sell them abroad. However, to implement this plan, not only a cheap dollar is needed, but also so that the dollar remains the world's reserve currency. In this case, the United States will be able to continue to increase the debt base, which is the basis of the well-being and financial system of this country. That is why Trump does not cease to "pick on" the Fed and claim that America's main enemy is not China but the Fed. That is why Trump needs low rates, which is almost guaranteed to cause the dollar to drop in global financial markets.
Well, the technical picture on the 24-hour timeframe has not changed much since the last review. The euro/dollar pair again adjusted to the critical line, bounced off from it again and can now resume the formation of a downward trend. The target is 1.0883. If the ECB lowers its key rate in September and announces the use of other monetary easing instruments, the euro could go down to a record 1.05 against the US currency.
Trading recommendations:
The trend for the euro/dollar pair remains downward. Bears reached the support level of 1.0967, so now you can count on a rebound and a slight increase in the pair. But in general, given the fundamental background, we believe that the pair's fall will continue in September.
In addition to the technical picture, fundamental data and the time of their release should also be taken into account.
Explanation of the illustration:
Ichimoku indicator:
Tenkan-sen is the red line.
Kijun-sen is the blue line.
Senkou Span A - light brown dotted line.
Senkou Span B - light purple dashed line.
Chikou Span - green line.
Bollinger Bands Indicator:
3 yellow lines.
MACD indicator:
Red line and bar graph with white bars in the indicator window.
