18.06.201914:02 Forex Analysis & Reviews: EUR and GBP are expected to weaken before the FOMC meeting

On the eve of the FOMC decision, world markets are trading in a narrow range. Consolidation is quite objective since it is expected that following the FOMC meeting may announce serious changes in monetary policy. In particular, the markets expect the Fed to recognize the fact of a slowdown in the US economy and worsen macroeconomic forecasts, which refers to achieving full employment but it is no longer possible to ensure high growth in jobs, and will not deny the possibility of lowering rates this year as well. Confirmation of the consensus has emerged in recent weeks and officially will give a start on changing global trends.

The reaction of the markets to the results of the FOMC meeting may be different. If the markets consider that the FOMC has not given sufficient dovish hints, then stock indices may collapse, since there are no reasons for their further growth, except for calculating the influx of new money. The US Treasury report on the movement of foreign capital published on Monday showed that the inflow of new money slowed down to almost zero last year. Foreign investors are withdrawing from the US national debt. But even more clearly from the US stock market, the net outflow of US stocks amounted to 214.2 billion dollars over the past 12 months.

Trump's fight for customs duties reflects, among other things, the problem of a too strong dollar, which makes American goods uncompetitive. Despite the fact that foreign investors reduce the purchase of US securities, the dollar is not weakening and even if we assume that Trump will be able to achieve all of the goals in trade wars, there will still be no result.

At the same time, the decline in demand for the dollar will leave the states to face to face with its gigantic debt, for which the US will not have enough domestic resources. As a result, the final formula for solving a problem should include several parameters at once that are usually considered incompatible. A decline in the dollar rate with simultaneous steady demand for it, as well as an increase in world trade and a reduction in escalation while refusing de-dollarization, which means Trump's rejection of the trade wars policy first of all.

The inability to solve all the problems at the same time suggests that the trend towards strengthening the dollar will continue regardless of the FOMC decision. Only the simultaneous announcement of the beginning of the monetary easing cycle of the Fed and the announcement of the US-China trade agreements can stop the growth of the dollar.

EUR/USD pair

The ZEW economic sentiment indicator for Germany dropped sharply in June 2019 and now stands at -21.1 points. The sharp drop in the indicator coincides with the growth of uncertainty about the prospects for the global economy as a whole. There was a sharp decline in production indicators in Germany in the 2nd quarter of 2019 and the mood in the eurozone as a whole also dropped sharply from -1.6p in April to -20.2p. in May.

The growth of consumer inflation in May amounted to only 0.1%, which is below the forecast of 0.2%. Altogether, the base index dropped by 0.1% on an annualized basis and inflation fell from 1.7% to 1.2%. The inflation target set by the ECB at the level of 2% is relegated to a nebulous future and the euro is going down since there is no reason for the growth of the European currency.

In the previous review, we assumed a decrease in EUR/USD pair to 1.1170 / 75. The goal was almost achieved and the chances of continuing the movement are high. The goal is shifted to the zone of 1.1130 / 35 then 1.1106. Overall, the further fate of the euro will be determined by the outcome of the FOMC meeting.

GBP/USD pair

As expected, the pound went out of range. The support of 1.2556 did not hold out. Nothing restricts the movement of the pound to 1.2310/20 if the outcome of the FOMC meeting turns out to be no less dovish than the market expects.