The U.S. economy failed to grow by 3% in 2018

Even if Donald Trump failed to achieve the 3% GDP growth rate promised during the pre-election campaign (in 2018, the US economy expanded by 2.9%), however he can be proud of himself. In Q4, 2018, the U.S. GDP rate expanded by 3.1% Y-o-Y. On a quarterly basis, the indicator (+2.6) exceeded the forecasts of Wall Street Journal experts (+2.2%), which set the EUR/USD bulls back. If the U.S. economy is so strong, what’s the point in selling the U.S. dollar?

We all perfectly know why the US GDP for the first time since 2004 has been growing by not less than 2% Q-o-Q in each quarter. The U.S. economy had already been at its growth peak when Donald Trump stimulated the expansion by means of the tax reform. But still, there is a despite. The US GDP was growing at an impressive pace despite a decline of global demand, turmoil in the financial markets, trade battles with China and 35-day Government shutdown. Particularly optimistic is the surge in business investment, which maintains hope for steady GDP growth in 2019

Dynamics and structure of U.S. GDP

Source: Financial Times

Even if the confidence of the U.S. administration in the economy 3% growth this year looks to be an exaggeration, nonetheless, the assumption that the euro-area GDP should recover its growth seems to be unreal. According to the FOMC, the US GDP growth will go down to 2,3% in 2019, to 2% in 2020 and to 1.8% in 2021. The ECB suggests a steady expansion by 0.5% Q-o-Q in the January-March period and in the April-June period, however, Bloomberg experts are not that optimistic in their assessments.

Forecasts for European GDP

Source: Bloomberg. 

There is a reasonable question, why the euro is strengthening. Is it because the easing of the US-China trade conflict? Let’s stop daydreaming, shall we? First, the agreement hasn’t yet been signed and Donald Trump may give up on it any time. Second, the euro is the same funding currency for carry trades as the dollar and the yen; so, improved global risk appetite puts the same pressure on it as on its rivals. It is remarkable that the returns from the euro-funded trades have been higher for 19 out of 21 emerging markets’ currencies in 2019.

Effectiveness of carry trades funded in different currencies

Source: Bloomberg

In my opinion, it is not about EUR/USD. The pair has stuck in the narrowest consolidation range since 1999 and can’t find any drivers to get out of it. In the January-February period the corridor was about 3.4 cents. In the October-December period it was 4.1-cent wide. On average, over the entire period of the euro existence, it is 9 cents for a quarter. One may of course hope that Brexit, the meetings of the Fed and the ECB in March, will drive the FX volatility up, but it must be understood that it was pressed down by the central banks. Their unwillingness to take any measures together with hints at LTRO allowed investors to be sure in the ample liquidity. Therefore, the EUR/USD will hardly exit the trading range of 1.125-1.15 anytime soon.

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Price chart of EURUSD in real time mode

Dollar failed the promise

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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