The return of market volatility reminded investors about the advantages of the US dollar, which they have recently stubbornly ignored. The rapid growth in Treasury yields, the increase in the likelihood of four federal fund rate increases and the potential overclocking of US GDP to 3% under the influence of fiscal stimulus can not be combined with the fall of the USD index to the level of three-year lows. At the same time, the reduction of political risks after resolving the issue with the ceiling of the national debt became the catalyst for the collapse of EUR/USD to its lowest mark in a couple of weeks.
On Forex, conversations are growing stronger that the euro has gone very far upward. While the Federal Reserve spokespersons talked about possibility of 3-4 moves to tighten monetary policy, their ECB colleagues remain committed to ultra-soft policies and express dissatisfaction with the excessively rapid strengthening of the single European currency. According to the monthly statement of the European Central Bank, the risks of a slowdown in the euro area's GDP are related to external factors, including foreign exchange markets. The regulator believes that, based on the oil market conditions, consumer prices in the coming months will continue to slow down, and core inflation will remain subdued. In January, CPI grew by a modest 1.3%, what kind of normalization can we talk about?
Yes, one of the largest German unions IG Metall agreed to raise wages by 3.8-3.9% in 2018-2019, which allowed the head of the Bundesbank, Jens Weidmann, to state that this deal will contribute to the growth of inflationary expectations, but in fact, it is not so simple. In the eurozone as a whole, the average salary grew by 1.6% by the end of 2017. The indicator did not exceed 2% since 2012. The labor market has many vulnerabilities. In particular, the ECB study states that the improvement of its situation is connected with pension reforms that allowed older people to return to work, as well as an influx of migrants and women. In the medium term this can help to reduce the supply of labor.
The dynamics of the labor market indicators of the euro area
Source: Bloomberg.
Thus, it is not necessary to speak about a steady growth of European inflation in the direction of the targeted 2%, and hence the statement about the imminent termination of QE is not worthy of attention. This is despite the "hawk" of the Governing Board as Weidman talking about a phasing out of the asset purchase program after September. At the same time, the Fed will continue to raise rates, expanding the yield differential of US and German bonds. And if this factor at the turn of 2017-2018 did not work, as soon as it starts to do it, the correction of EUR/USD will accelerate. Probably some of the speculators, which have accumulated record-breaking net euros in the futures market, understand this and are gradually cashing in profits. Especially since before the Italian parliamentary elections on March 4, there is less and less time.
Technically, the EUR/USD quotes outside the current downward trading channel will increase the risks of implementing the target by 161.8% on the "Crab" pattern.
EUR/USD, daily chart
