EUR/USD is a little more than half a figure from the bottom of the consolidation range of 1.1265-1.1485

The US dollar is a short step away from the longest rally since February, 2017. The USD has closed in the green zone for six consecutive trading days. In early 2017, it was about 10 days. In the week, ending February 8, the greenback had been 1.1% up, which is the best performance since August, 2018. Investors, who bet on the dollar fall, are now facing a challenge. The Fed’s willingness to pause the monetary normalization alone is not sufficient to weaken the US dollar. It is also necessary that the competing central banks won’t change their former courses. But they are unfortunately fundamentally revising their further monetary policies.

After Jerome Powell had announced about the Fed’s flexibility and patience, he basically cut off other regulators’ support from the air. It is one thing when the leading global central bank is hiking the interest rate for four times. It is so can be said about the normalization start. Another matter is when it is staying sideways. If they go on like this, they will have really big troubles. The hawkish rhetoric will strengthen the local currency and press down the US exports even stronger.

Dollar is rising despite a drop in the US Treasury yield. As a rule, higher yields of the US bond market results in its strengthening due to enhanced appeal of the assess. However, in this world everything is relative. Japan 10-year bond yield is -0.03%, the second lowest indicator for the past two years, German government bond yield is about to enter the red zone. The demand for safe-haven assets is growing all over the world, and the greenback takes an advantage if it. Yes, it must be admitted that, including hedging costs, the efficiency of investments in the US securities is lower than in German ones, but nobody forces European investors to hedge against the risks! They should start doing it if they are confident in the USD bearish outlook; it is still too early to speak about it.

Dynamics of the bond yields of USA and Germany

Source: Bloomberg

Strong appeal of safe-have assets also results from uncertainty around the US-China trade talks. If Donald Trump and the Congress fail to reach an agreement before the mid-February, there could be another government shutdown or an emergency proclaimed. My basic scenario of the trade talks suggests that China should make more concessions, the USA should accept them and won’t increase import tariffs. However, if anything goes wrong, the greenback may be growing as fast as it used to do in 2018 amid the regular worsening of the trade conflict.

The euro is pressed down by the concerns about the report on German GDP data for Q4, 2018. If German economy records a technical recession, the entire euro area will suffer. After all, as experience proves, only 4 out 13 declines in Germany’s growth from 1995 to 2008 had resulted in the recession in the entire currency block. The EUR/USD fall below the supports at 1.129 and 1.1265 will make it more likely to go on declining towards 1.118; however, the euro bulls still hope to consolidate in the price range of $1.13-$1.133.

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Price chart of EURUSD in real time mode

Dollar is going for record

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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