EUR/USD bears drove the rate below 1.15 due to the U.S. Treasury yield growth and Italy’s political crisis.

The U.S economy is functioning in surprisingly favorable conditions, and there is every reason to assume that its current cycle will continue for some more time. Such Jerome Powell’s speech perfectly expresses the market sentiment. The EUR/USD pair dropped down below figure 15 because of the gap in economic expansion and monetary policies. In fact, while the Euro-area retail sales have been in the red zone for two months already, and the European PMI is disappointing; the U.S. macro-statistic data go on increasing.

In September, the U.S. purchasing manager index, reported by ISM, hit 61.6, the highest point since 1997. The U.S. employment index is up at 62.4, from 56.7. It suggests the report on the U.S. employment will be quite positive. Especially since ADP has reported an increase in private sector employment by 230,000, compared to the expected + 185,000. According to Richmond FED president Tom Barkin, the U.S. economic growth is steady and the market look sound. It supports the ideas of the Fed’s monetary normalization. Jerome Powell believes that the fed funds rate is far from its neutral level, so the FED can safely hike it.

Strong macroeconomic statistics. Fed’s hawkish rhetoric, and the trade deal between the USA, Canada and Mexico that reduces the risk of the region’s GDP slowdown, pushed the U.S.10-year yield up to 3.18%, the highest since 2011. It is not surprising that the U.S. dollar is going up in this situation. Especially to the euro, challenged by political problems. Italian crisis is getting worse, widening the Italy/Germany bond yield gap to the critical level of 3%.

Dynamics of Italy-Germany bond yield spread

 

Source: Bloomberg

The Italian government set the budget deficit target at 2.4% of GDP, approved by the finance ministry. Besides, the euroskeptics are confident that the Italian economy will expand by 1.6% in 2019, so they will be able to cut the national debt earlier than it was planned before. The European Commission can have strong doubts in Rome plane, judging by Italian GDP 1-percent growth in the first half of the current year, and its forecast for 1.1% increase next year. The tensions will be hardly eased until at least mid-October, pressing the euro down.

It is remarkable that the markets believe the situation to improve. It is suggested by the spread between the Italy-Germany bond yield gap and EUR/CHF rate.

Dynamics of EUR/CHF and Italy-Germany 10-year yield gap

Source: Bloomberg

Franc is a kind of risk index in the Euro-area, and, as it is not increasing, investors believe the matter will be settled down. This fact suggests that EUR/USD may not drop too deep. According to 30 Reuters experts, the low can be at 1.14.


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Price chart of EURUSD in real time mode

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