EUR/USD bulls’ inability to consolidate above figure 16 base means their weakness

In Forex, currencies’ rates do not always rise because there are drivers for it. Investors invest money in the assets, which engage lower risks to lose their money. They will hardly buy euro because of political risks in the euro area its economy inability to show the same growth pace as in 2017. They will hardly go long for the pound, as there are high risks of no-deal Brexit. They are unlikely to be willing to catch falling daggers in case with the emerging markets’ currencies, whose problems boost the demand for the U.S. dollar. It is the greenback that now seems to be the currency, which may cause the least losses.

Using the flows of cheap liquidity from the Fed and low interest rates after the crisis of 2008, the financial world has been accumulating the debt, most of which is nominated in the U.S. dollar. According to JP Morgan, currently, $11.5 trillion of the international debt is denominated in dollar, $3.5 trillion is in euro and $0.4 trillion is in yen. The most active have been the emerging markets, which have been increasing the USD debts much faster (+128%) than the developed economies (+84%). 

Dynamics of the EM debt and the US interest rates

Source: Financial Times

Dynamics of credits by currency of denomination

Source: Financial Times

Increased borrowing costs, resulted from the Fed’s monetary normalization; trade conflicts and the associated risks of a decline in Chinese economy growth, which is the largest importer of commodities; as well as the sanctions triggered the panic in the emerging markets. The EM currencies are competing for lowest rank of the year. The Argentine peso and the Turkish lira seem to be performing the worst; other EM currencies are extremely weak as well. Investors have more and more doubts that the EM gold and forex reserves will be sufficient to support the local markets and avoid the default.

Yes, according to some techniques of fundamental analysis, dollar looks expensive. It is trading 11% higher than its 10-year average true rate. The trade-weighted USD, according to the Fed, is only 4% lower than its historical high, occurred in 2002. According to OECD data, based on the purchasing power parities, EURUSD should be now trading 15% higher than it currently is. It is, of course, quite promising, but the markets are ruled by the Fear and the Greed. In the context of the current uncertainty and instability, the fear of losses turns out to be stronger than the desire of profits. That is why USD trend looks like a fading correctional movement and going back to the uptrend, started in April.

It is hard to sell the U.S. dollar when the probability of Fed’s rate increases in 2018 is up at 75%, form 60%. When Donald Trump is going to expand the import tariffs, targeting China, by $200 billion. When Atlanta Fed suggests that the U.S. GDP rate will be 4.6% up in the third quarter. EURUSD bears are accumulating the power to storm the resistances at 1.1535 and at 1.15. Another matter is whether they will succeed or not.

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Price chart of EURUSD in real time mode

Dollar Ignores Rivals

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