Moderate positive data on the US GDP can be seen as a reason to exit EUR/USD shorts
Mario Draghi’s optimism wasn’t enough to hold the major currency pair above figure 14 base. The ECB president has noted that there isn’t any crisis. The Euro-area faces just a weaker momentum. Besides, the European economy strength allows the Governing Council to be confident that the inflation rate will reach 2% target. The reasons for the GDP growth decline are not yet clear. They are likely to be the problems with the German car industry, difficulties in the emerging markets and, in some terms, the crisis in Italy.
The central bank expressed willingness to end its €2.5-trillion quantitative easing program this year as it had been expected. It seems reasonable, as, in case of further GDP rate decline, the ECB will have as the measures only LTRO and ultra-low rates, which may be increased later than the markets expect now. Responding to the questions about Italy, Mario Draghi suggested Rome restrain its rhetoric and not raise a storm in a teacup about the euro existential crisis. In addition, the ECB president expressed confidence in the soon compromise between the EU and Italy.
Following the press conference, investors again started buying the U.S. dollar that benefits from strong economic growth and bond yield, as well as the safety of the US assets. According to Bloomberg experts’ consensus forecast, the US GDP will be 3.3% up in the third quarter (WSJ – 3.4%), following +4.2% Q-o-Q in the second quarter; it should become the best indicator dynamics since 2014. The experts’ forecasts range from 2.4% up to 4.2%.
Dynamics of the US GDP
Source: Wall Street Journal
EURUSD bears are concerned that the increase in the US GDP rate in the April-September period has already worked out; if the US economy loses its momentum in future, affected by weakening fiscal stimulus effect, speculators will start fixing the profits for USD positions. According to Citigroup, low correlation between the Treasury yield and the U.S. stock indexes can’t last for a long rime. The equity market drop and economy slowdown, also because of trade wars, will result in a decline in 10-year Treasury yield; and it’s a bearish factor for the greenback.
Therefore, we are likely to watch a performance in trading on October 26. Large traders can use strong statistics on the US GDP (3.3-3.5%) to exit EURUSD shorts. If so, bulls shouldn't be too much excited. Weak euro-area economy, along with the Italy’s crisis, will hardly drive the euro rate much higher. If the actual US GDP rate turns out to be higher (+3.7% and more), the euro will continue falling against the greenback.
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