Enter EUR/USD trades, based on the reports on the Euro-area GDP and German inflation

Will the US economy slow down? Will the Fed change its plans for the fed funds rate hikes? And how bad the political crisis in the euro-area is? Investors calm down after the turbulent week, ended October 26, and start discussing really important matters. The answers will give a clue about the EURUSD middle-term prospects.

According to the increase in the US personal consumption expenditure by 4% M-o-M in September amid the higher wages, I can assume that the US macroeconomic statistics will be positive in the fourth quarter. On the other hand, the PCE hasn’t reached +0.165% M-o-M for the fourth consecutive month, necessary to meet the 2% target on an annual basis. If the Fed is controlling the inflation rate, then why should it raise the interest rate? Perhaps the most reasonable explanation for the Fed’s future activities was offered by the FOMC vice chair Richard Clarida. He is willing to vote for faster monetary normalization process if the employment in 2019 will be as good as in 2018, and the actual and expected inflation will increase. The combination of the strong GDP rate and the steady inflation should be the reason for the Fed to slow down monetary restriction. Meanwhile, the second scenario looks more beneficial, and so, some speculators fix the profit for the USD potions.

The greenback is supported by the stocks stabilization. Yes, S&P 500 has been about 10% down from its September’s highs, but the earnings multiplier (price/earnings ratio) has been down below its five-year average value. From a fundamental point of view, it suggests that the natural correction should exhaust soon. In fact, if the Fed slows down the monetary normalization process, then the strong US economy, positive corporate reports and low borrowing cost, in historical terms, will lure investors back to the US shares.

Dynamics of the earnings multiplier (price/earnings ratio)

Source: Bloomberg

The euro still can’t recover after the political shocks. Angela Merkel’s announcement that she will step down as German chancellor in 2021 is seen as an increase in the euro-area political risks. Next, markets have started discussing that the euro-area will give up the fiscal consolidation policy, featured by German leader. If the currency block adds the fiscal stimulus to the monetary one, nobody will doubt that the European GDP will regain the growth rate, featured in 2017. At the same time the Italy’s problem will be solved, as it will be the first signal that the EU will change its rules.

Anyway, it is still too early to discuss the future. On the short-term investment horizon, the EURUSD may be affected by the reports on the euro-area GDP in the third quarter and German inflation in October. The growth-gap between the US and the European economies could have worked out already; if so, even the moderate positive can support the euro. However, the bulls can recover only after obvious tests of the resistances at 1.143 and 1.15.

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Price chart of EURUSD in real time mode

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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.

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