US assets are getting less appealing, pressing the greenback down
EUR/USD bulls have performed their first task, driving the pair rate back into the trading range of 1.125-1.15; however, their success resulted from the dollar weakness. A decline in the US consumer prices to 1.5% and the core inflation to 2.1% in February allowed the derivatives market to increase the chance of the Fed’s rate cut in the current year up to over 20%. At the same time, the Treasury 10-year yield broke through the bottom of the consolidation at 2.61%-2.8% where the indicator has been trading during most of 2019. Weaker appeal of the US assets, as a rule, results in the capital outflows from the corresponding ETFs and presses the greenback’s value down.
Dynamics of the U.S. Treasury yield
Along with a decline in the inflation growth, the Treasury yield has been pressed down by another denial of the UK Parliament to adopt Theresa May Brexit draft agreement, as well as by the outcomes of the Treasuries placement auction. Eventually, the appealing rate of 2.615% has been set.
Dollar is put a pressure by a change in the balance of power in the global stock market. From early January to the mid February, the US stock indexes were ahead their foreign peers (MSCI USA index was 11% up during that period, MSCI All-Country World Index increased by 7.35%); but the situation has changed over the past four weeks. Global stocks are growing faster than the U.S. securities, which deprives the greenback of an important advantage. The matter is that the USD, as a rule, is trading up if the US GDP rate looks better than the global indicator. That was so in 2018, when, affected by the massive fiscal stimulus, the US economy growth accelerated up to almost 3%, but the global GDP growth was slowing down due to the trade wars. The stock market indicates the state of a particular economy; therefore, the leading growth of MSCI All-Country World Index over the MSCI USA index should be seen as a bullish factor for the EUR/USD.
Dynamics of stock indexes
The euro is somehow supported by strange behaviour of the US administration in relation to a possible increase of the import tariffs on European cars. Last year, Donald Trump, following the report on national security, quite increased the import tariffs on steel and aluminum; however, this year he doesn’t seem to be taking active measures. The new report was published on February 17, and, according to the laws, the US administration has 90 days to do something. Furthermore, the Congress is working on a veto to override Trump’s import tariffs. If the US-China trade wars ends, and the US doesn’t start a new one with the EU, this will positively affect the euro-area exports and GDP growth.
Therefore, fading appeal of the US assets, a decline in the US economy growth and the belief in an end to trade conflicts encourage the EUR/USD bulls to go ahead. The pair rate is back in the range of 1.125-1.15; but still it looks like a Pyrrhic victory. But the situation may change once the euro breaks through and consolidates above $1.14-$1.142.
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Price chart of EURUSD in real time mode
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