EUR/USD further trend depends on S&P 500 and the situation in Italy

If something extraordinary puzzles you for the first time, then, when it occurs for the second or the third time, you will have a clear action plan. The first official interference of the U.S. administration in the financial markets have puzzled investors. Many of them started to buy out the drawdowns in autumn. In fact, Donald Trump’s criticism of the Fed turned out to be just a blank shot. The central bank is not going to abandon its plans because of the political pressure, or because of flattening yield curve, or because of a decline in the U.S. stock market. It is not about the trend reversal, is it?

The main reason for the U.S. dollar weakening in the week ended October 12 was not only the U.S. president’s comments, but the worst since February S&P 500 two-day fall as well. The leading increase of the U.S. equity market has been working to the greenback advantage during the last few months; and many wonder, if they really need to expect a deeper drawdown if the U.S. economy still looks better than the others; the U.S. Treasury yield growth has stalled; and the experts still suggest positive forecasts for the corporate profits in the third quarter.

Dynamics of equity market


Source: ZeroHedge 

Even if the US equities are more expensive than the US bonds, I can hardly suggest the trend reversal, when the US economy looks strong, the issuers reports are positive and the inflation rate is steady. At present, 10-year Treasury yield is at 3.15%, which is lower than it was when the US GDP rate was at 3%, and the inflation rate was at 2%. Cornerstone Macro, referring to the experience of 1994, 2006 and February, 2018, claims that one shouldn’t be concerned with S&P 500 drop when the bond yields are increasing. The correction is likely to be temporary. Another matter is the simultaneous drop of the stock indexes and the Treasury yield. This situation can be the first sign of recession.

Dynamics of the US GDP and the US Treasury yield.

Source: Wall Street Journal

The further situation in the US equity market, and, correspondingly, the greenback future will depend on the corporate reporting. Besides, unlike the previous week, the EURUSD rate will depend not just on the dollar, but on the euro as well. The Italian government is willing to advance its budget plan with the deficit of 2.4% from GDP in Brussels, and the conflict worsening can put pressure on the single European currency.

Even if the ECB officials claim it to be not that bad, the central bank can’t provide the liquidity to fund the governments and insolvent borrowers. The reminder of that by Sabine Lautenschläger is another evidence that the European central bank has some measures of impact against the recalcitrant.

To develop the upward correction in the current EURUSD middle-term downtrend, bulls need to draw the rate above 1.161. Otherwise, the breakout of the supports at 1.15 and 1.145 gets the euro more likely to continues falling down.

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Price chart of EURUSD in real time mode

Dollar Votes for Equities

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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