As the EUR/USD entered a resistance and support channel on the 25th of January after reaching a resistance level at 1.25 dollars per one euro, the exchange rate remained volatile between levels of 1.22 and 1.25. Uncertain rumors about a rate hike in 2018 constitute an early precursor for the US economy to get stronger against the Euro Zone.
US inflation has been higher for 2017, and two increases in Federal Funds Rates were made (currently at 1.5%) in order for the economy not to overheat and maintain competitiveness relative to its biggest trading partner, Europe, where interest rates haven’t moved from 0% since the beginning of 2016. This year, the FED continues to aim for a 2% interest rate, but expectations are that it can increase even more. The reason could be the new expansionary fiscal policy, through which the US government decided to cut corporate taxes from 35% to 20%. According to primary estimates, this might cause the budget deficit to increase by 1.5 trillion US dollars.
Since Donald Trump has been announced as the new president elect in the so called “11/9”, the US dollar has been losing value against the euro. However, he is taking rather exagerated credit for contributing to the US economy by implementing new tax bill at the end of 2017.
But in terms of market activity, companies were pleased to hear that in the upcoming years, the newly elected president will favor them with a tax cut. However, a clash of lower tax rates and higher interest rates can be seen, as recent S&P 500 skids occurred in February causing greater uncertainty about the future of the stock market, since it has been etching historical heights together with the Dow Jones Index since April 2013. A higher interest rate and its increase to the anticipated 2% can discourage investors and this might result in further decreases in major US Indexes. Therefore, a possible profit fixation can be a catalyst for greater uncertainty to prevail, together with tumbled optimism and the market sentiment being at a 14-year high, giving a hint to step back from the existing euphoria in financial markets before it is too late.
As for now, speculations are in favor of the EUR/USD exchange rate to bounce from resistance level at 1.22 due to expectations of the FED increasing interest rates, and consumerism from US companies’ point of view. However, the long run currently is too obscure to have decent expectations about the future.
By Linas Bagdonas,
Market Analyst at the Investment Fund