ECB vs Trump's administration? Who picked the winning strategy?




Perhaps the most traded pair on the FX market. The EUR/USD faces 2 of the largest central banks and their monetary policies against each other. What can we expect from the currency pair in the long run, what are the key levels and where can we look for positioning?

On a weekly graph, we see a pronounced downward trend, which ended with consolidation (started in early 2015). Then (mid-2017), the consolidated movement is over and has been on a ascending trend. What is the reason for this?

When D.Trump was elected for President of the United States, everyone welcomed King USD. But maybe the market celebrated too early. The promises made by Trump during the election campaign are being carried out too slowly (at least according to the market). Changes in corporate taxes have made a positive impact on companies and have a negative impact on the state budget. Still .. the country feeds it-selves on taxes (much of the tax paid by companies). And what happened, the tax was reduced by the shouting 15%. Company managers gave big bonuses to their workers. And everyone was happy .. for a while. A real reduction in corporate tax increases the budget deficit (which is currently at record levels). This causes the central bank to raise the interest rate faster than expected and desired. Eventually, Trump's idea is good. Reducing corporate tax will make US companies more profitable to carry out their production in the country. They will have the opportunity to lower manufacturing prices (because they will pay lower taxes) and will ultimately benefit both small consumers (because they will buy cheaper) and companies (they will have more funds for operating). Companies will be able to export much of their production because they can produce more, which will create USD demand from foreign buyers and will eventually raise the dollar. The problem is that this plan is slowly being implemented. It will be a long time before Trump's idea has a real effect on the economy.

On the other side of the equation is the ECB and EUR. The Union as a whole has already emerged from the crisis and the pace of growth hastened. The economies of the continent show steady growth and expand their production. And the most important ! The currency of the union is strong despite significant bond purchases (QE) and negative interest rates. EUR strongly favored if Mario Draghi decides to change any of the two Central Bank policies. Higher interest rates will lead to a shortage of EUR in the economy because 'easy money' with little or no interest will disappear. If QE is dropped (or reduced), pouring money in the economy will come to an end and it will create a shortage of EUR.

So .. what can we conclude from what we said? EUR will increase in the long run (If the ECB fulfills its intentions and reduces QE and lowers the interest rate) and USD will also rise due to low corporate taxes. Fundamental analysis indicates that it is likely that the pair will re-enter consolidation as it is around its fair levels.

The technical analysis shows that the price is approaching a major diagonal resistance of 1.2650 and Fibo 38.2 Around these serious levels of resistance, we can expect a EUR decline and an increase in the dollar (at least in the short run). On the other hand, if the price goes above this key level of resistance, we will look for long positions.

Trader Bozhidar Arabadzhiev

 Varchev Traders

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