The EUR/USD may continue its rally up to 1.138 and break through the June’s highs
Donald Trump wants to control everything but the financial markets are ruled by the Fed. The president criticized the central bank for a too grim forecast, but this was necessary. Jerome Powell and his colleagues do not rule out a V-shaped recovery of the US economy, which was voiced by Dallas Fed President Robert Kaplan. However, the basic scenario is still the Nike-shaped recovery of the US GDP. If so, there will be needed huge volumes of monetary stimulus. Once the Fed added more liquidity, the S&P 500 has been up, which has sent the US dollar down.
The Fed has outlined its corporate bond-buying program and the detail of lending to commercial companies. The central bank will create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. First, it will calculate an aggregate for the entire $9.6-trillion market, according to which it is planned to purchase the securities. According to Morgan Stanley, the Fed will buy corporate bonds for $385 billion, BofA Merrill Lynch believes that it will be about $419 billion. At the same time, the Federal Reserve is willing to give about $ 600 billion in loans to businesses with up to 15,000 employees and incomes up to $5 billion. Banks, which give them money, can sell up to 95% of loans to an investment agency organized by the Boston Federal Reserve
The US stock market has rebounded after the Fed’s announcement, and this is not surprising. The stock indexes usually rise amid ultra-easy monetary policy, economic expansion, low loan rates, and positive corporate reports. There could be problems with the US corporate reporting, however, if the GDP rebound is V-shaped, the middle- and long-term outlook for the stock market will be rather positive. The rise of the US stock indexes has weakened the US dollar, which is also natural. Since May, the negative correlation between these two assets has been increasing steadily.
Dynamics of the U.S. dollar and S&P 500
Source: Trading Economics
A stronger negative correlation results not only from the greenback’s safe-haven status but also from the Fed’s effective measures to satisfy the foreign demand for the dollar. This required less money than during the previous recession. In the first week of June, the foreign central banks acquired $447 billion through swap lines, in 2008-2009, it was $583 billion.
The lower demand for the greenback reduced hedging costs for the purchases of the US assets. The European investors can afford to resume the favorite strategy of the S&P 500 longs and USD shorts. As a result of lower hedging costs, the EUR/USD looks much undervalued.
Dynamics of EUR/USD and hedging costs
Source: Nordea Markets
In my opinion, if level 3000 is the S&P 500 local low, and the stock index resumes the rally or starts consolidation, the EUR/USD pair should break through the June’s high. I suggest holding the longs entered in the zone of 1.122-1.124 up and adding new purchases.
P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂
Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.
- I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
- Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while depositing your trading account.
- Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.