Greenback is carrying on with a slump, being under pressure from the bullish ECB expectations. This is inclined to work out as retreat from the ultra-low interest rates based on the pickup of the Eurozone economy. The belief that FED will retain hawkish spirit is weakening, despite the almost guaranteed June hike. Trump’s fiscal and tax initiatives seem to be bogged down in the uncertainty of political intrigues and trials in the White House.
The American currency is highly sensitive to every message from the FED, but after Trump’s election, the political factors seems to have outweighed the FED. If you look closely at the reflation trade which spurred rally of the US assets, especially the Dollar, you can see that it fits perfectly with the Keynesian theory (which, by the way, led the US out of the Great Depression), in particular with the IS-LM-BP mathematical model. According to this model, government spending growth initially causes GDP growth and the increase in domestic interest rates. Higher rates attract foreign investors, causing capital inflows and thus appreciation of the exchange rate. Particularly these market expectations give a push to the Dollar rally in November. Accordingly, the delay in the president’s plans has already had the opposite effect, which is now likely to dominate the bearish sentiment of the US currency.
It should be noted that within the model framework, further strengthening of the national currency reduces exports as the goods competitiveness on the world market is falling. This, in turn, negates the growth effect in government spending on the GDP and the interest rates, essentially making the state incentives ineffective in the long term. Here is why Trump said that the strengthening of national currency could potentially harm the economy and urge the FED to cut the interest rate hikes, which will additionally lead to an inflow of foreign capital, causing an even faster currency strengthening.
Investors are cautious ahead of the ECB meeting, the Euro is trading in red, despite the rumours about tapering off. Draghi can continue to talk about weak inflation and low rates. Uncertainty hinders the short-term forecast, but the pair EUR/USD will probably gain further under the rising bullish pressure. Retail sales in the Euro area rose 2.5% in May, with a forecast of 2.1%. Investment expectations also rose more than expected.
Geopolitics keeps investors in suspense, Gold and Yen have gotten through the next psychological barrier. USD/JPY has lost more than 1% and XAU/USD has exceeded $1,290, heading to $1,300.
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