The US economy is not as strong as it seems to the US president

If you don’t praise yourself, you’ll be praised by nobody. However, as Donald Trump’s experience has proved, you should do it extremely carefully. The US president proudly wrote in his twitter that the US economic growth (4.2%) has exceeded the unemployment rate (3.9%) for the first time over a hundred years. In fact, the same was in 2006 last time. The White House has to make excuses, explaining that the mistake is likely to result from the incorrect information, presented to the US president. Anyway, but it is the US strong economy, including strong employment, the Fed’s monetary restrictions and trade tensions that are the main drivers for the USD rally. But it is important that it is all about divergence.

Dynamics of the US GDP rate and the US unemployment rate

Source: Wall Street Journal

The mass fiscal stimulus has accelerated the US economic growth up to 4.2% Q-o-Q in the second quarter, providing the widest gap with its European counterpart since 2014. Nevertheless, the things are changing in September. It is not obvious whether the US economy will grow at the same pace in the third quarter. At the same time the EU-US trade war truce, improved situation with Brexit and weaker euro can become strong reasons for the Euro-area GDP growth recovery. It is not by chance that the euro responds to the speech of the EU chief negotiator, Michel Barnier, that London and Brussels will have reached an agreement by November. Neither party will benefit from the breakdown of economic relations.

Another important factor is an increased probability of the ECB monetary normalization start. Mario Draghi and his colleagues previously emphasized the gradual increase of the Eurozone GDP rate; however this version wasn’t proved until the UK economy surged in May-July period. The GDP increase by 0.6% Q-o-Q proved the Bank of England, stating the same things as the ECB, to be right. Thus, the growth gap between the US economy and the Euro-area is likely to get narrower, depriving the dollar of its important advantage. In addition, the political risks in Italy are reduced, and so, EURUSD purchases start looking appealing. However, I’d war traders, who are eager to buy it right now. Haste makes waste. The greenback still has a few advantages that won’t let investors get rid of it, like of a toxic asset.

First of all, it’s about trade wars. Donald Trump threatens to boost the total amount of the tariffs on China’s imports up to $517 billion; which is more than China’s total imports were worth in 2017 ($505 billion) and is almost equal to the amount if imports over the past 12 months ($529 billion). If it is brought to reality, all emerging markets will collapse. However, there is an idea that the US president wants to put a pressure on Canada and the EU in this way. We shall see. Meanwhile investors are focused on the report on the US inflation rate in August. A sharp increase of the indicators above the expected rate will make the Fed more likely to aggressively increase the interest rate and will encourage the EURUSD bears to press the euro down towards the bottom border of the trading range between 1.15 and 1.185. Otherwise, if a lower CPI will be a reason to go on buying the euro.

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Price chart of EURUSD in real time mode

Dollar Made a Mistake

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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