The euro felt very confident at the beginning of the last week of June contrary to Mario Draghi’s hints at a weakening of monetary policy, as well as weak statistics on European inflation, business activity in the manufacturing sector and the German business climate. Investors have adopted the depth of the potential monetary expansion of the leading central banks of the world. If the interest rate on deposits of the ECB is practically nowhere to reduce, it already amounts to -0.4%, then the Fed has room to roam. The figure of 2.5% is quite a decent figure. It does not matter that borrowing costs in the Old and New World were 4% and 5% at the beginning of the previous cycles of monetary easing.
As a rule, expectations of lower rates or resuscitation QE is “bearish” factor for any currency. The history of 2015 shows that rumors about the launch of a quantitative easing program led to a collapse in German bond yields and a decline in the euro. But as soon as the ECB began to buy assets, German debt rates went up. Many banks were selling previously purchased securities to the regulator. The principle of “buy on rumors, sell on facts” led to an increase in the yield of German bonds and allowed the EUR/USD pair to maintain stability for some time, despite the Fed’s willingness to begin the monetary policy normalization cycle.
Dynamics of bond yields in Germany
However, very soon everything returned to normal as the euro collapsed to the mark of $1.05and then to $ 1.035. History repeats itself and investors have the right to rely on the main currency pair to sink after Mario Draghi in Sintra, Portugal, started talking about lowering rates and QE. According to Bloomberg experts, the deposit rate will fall from -0.4% to -0.5% in September. About 42% of respondents expect to resume the program to purchase assets of €30 billion per month.
Alas, but if in 2015 the Fed hinted at an increase in the federal funds rate, now it is ready to lower it. At the same time, the potential of the monetary expansion of the American central bank is broader than that of its European colleagues. This allowed the EUR / USD “bulls” to push quotes to the area of 3-month highs. The further fate of the pair will depend on the outcome of the meeting between Donald Trump and Xi Jinping at the G20 summit in Japanese Osaka and on US labor market statistics for June.
Only a breakthrough in relations between the States and the Celestial Empire will allow the dollar to recover. In this scenario, the chances of a Fed rate cut will fall and the yield on US bonds will rise. If employment also pleases, the EUR/USD pair will start to move confidently to the bottom of the trading range at 1.11-1.14. Unfortunately, the chances of making a deal solely due to the meeting of the two presidents are not so great. The most likely scenario is the desire of the parties to continue negotiations, which will allow investors to shift investor attention to non-farm payrolls.
Technically, the implementation of the”Expanding wedge” and “Diamond-shaped bottom” patterns indicate the transition of control in the hands of “bulls”. The targets for the upward movement are the levels of 1.1445 (target at 161.8% for the model AB = CD) and 1.157 (target for Wolfe Waves).
EUR / USD daily chart