Massive sales of the US dollar brought the EUR/USD back to the zone of 2.5-month highs

When the market isn’t going in the direction it is expected to, it is likely to go in the opposite one. This rule of candlestick analysis is sometimes a typical feature of Forex. Since April, investors had been buying out the US dollar in hopes for the profits, yielded by the fed funds rate hikes and the U.S. trade wars with China. Dollar couldn’t get an advantage of the soon monetary restriction by the Fed and of the import tariffs expansion by $200 bn and by $60 bn in the USA and in China, so it is being sold off. Just in a moment, the market motto has switched to “buy everything else”.

It is obvious that the trade battle effects will be clear soon and the opponents may start negotiations any moment. It suggests that the emerging markets’ assets are oversold and increases speculators demand for them. Especially since the turmoil in Argentine, Turkey and Russia is over. The central banks increased the interest rates in order to stabilize the situation; together with the improved global economic improvement, it has allowed the JP Morgan EM currency index to show the best weekly performance for the year. I personally suggest that the EM currencies steady growth has become one of the key drivers, pressing down the USD rate.

Dynamics of USD rate and EM currencies index


Source: Bloomberg

At the same time, the principle “buy everything else” brought back the idea of divergence in monetary policies, having dominated in late 2017. If the emerging markets’ regulators are hiking the rates, why shouldn’t the advanced markets’ ones do the same? Inflation rate is increasing in Canada and Norway; SNB hasn’t put a stronger pressure on franc, The Riksbank and the RBA can well spring a pleasant surprise on the bulls for the Swedish krona and the Australian dollar.

The risk appetite is up, investors are selling off the greenback and the U.S. Treasuries, driving the apart the USD rate and 10-year Treasury yield. The bond rates respond to the soon increase of the federal funds rate, unlike the U.S. dollar that can’t benefit from this factor, because it has been already priced in dollar quotes. Moreover, BNP Paribas and Invesco, as the financial advice, suggest using the FOMC meeting in September to buy EURUSD. According to BNP Paribas, the EUR USD pair will be up at 1.25 in 6-9 months. Invesco expects the euro to hit $1.2 in late 2018.

Dynamics of the Dollar Spot Rate index and 10-year Treasury yield

Source: Bloomberg

I’ve already noted that an increase in the U.S. bond rates can encourage selling of the U.S. Treasuries in China as a retaliatory measure for Donald Trump’s protectionism. Anyway, until the information is not confirmed, dollar won’t be falling down that fast. As levels 1.171 and 1.175, EURUSD is getting more likely to go up towards the top border of the middle-term trading range of 1.15-1.185.

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Price chart of EURUSD in real time mode

Dollar Fell Out of Favor

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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