Investors’ strong interest in the U.S. dollar results from its competitors’ weakness as well

EURUSD bulls managed to draw the quotes up from the zone of 13-months lows due to the talks about new US-China negotiations and the renewing of July lows by the U.S. yield curve. The 10-2 year Treasury yield spread is down to 23.4 bps. The indicator is heading for the negative, and its inversion during the past half-century has been rather accurately suggesting the future recession. There are rumours in the market that in case of lower yield curve drop, the Fed will suspend monetary normalization, which is a bearish factor for the U.S. dollar

Dynamics of the US yield curve

Source: Financial Times

It is not logic to speak about recession when the economy's good state is no concern. Strong statistics on retail sales and industrial production prove that the US GDP will go on speeding up in the third quarter. Macroeconomic Advisers, the most accurate Wall Street Journal forecaster, raised the GDP forecast to 3.2%. If it meets the reality, the US economy growth will be the best since 2014 during two quarters in a row and substantially exceeds the average value of 2%, that has been during the current expansion. At the same time, underestimating of the yield curve by the former Fed’s chair-people ended very badly.

Euro managed to recover due to the information the Washington and Beijing are to resume the negotiations. The last round of talks between US Secretary of Commerce Wilbur Ross and ChineseVice Premier Liu He was in late June. Emerging markets positively responded to the news from China, allowing EURUSD bulls to go ahead. As I noted earlier, one of the reasons for USD rally is an excessive EM dollar-debt; the need to pay it back increases the demand for the greenback. In addition, the major currency pair is rather responsive to the capital outflow from the emerging markets ETFs.

Dynamics of EUR/USD and the index of investment in emerging markets bond funds

Source: Bloomberg

Negotiation is a good thing, but it won’t necessarily end with a truce. Investors, having bet on selling yuan and other currencies to the US dollar, took a break but haven’t given up on the yielding strategies. Greenback still looks as strong as a rock, and the problems of its rivals don suggest any reasons to catch the falling daggers. Euro is bothered by Turkey, Italy and the rumours about QE extension. The pound bogged down in the political arguments. The Australian dollar suffers a lot due to US-China trade wars. Each currency has its pressure point, so the demand for the U.S. dollar, with its strong economy and monetary normalization, is well-founded

What can set the USD bulls back? It is most likely the uncertainty about the parliamentary election in the USA. It may result in taking the profit for dollar long, which have been increased during 14 weeks. After all, the resistance at 1.143-1.1445 for EURUSD still looks rather strong.

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Price chart of EURUSD in real time mode

Dollar Uses Pressure Points

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