EUR/USD continues consolidating in the range of 1.15-1.185

Two steps forward one step back. Since mid-April, the U.S. dollar had been 7% up during 27 weeks; next, it was 2% down during 4 weeks. Although speculators are still holding $19.2 billion of net longs for the US dollar, the derivative market features more and more interest in the rival currencies, including the euro. Investors wonder whether the current USD dive is the beginning of the end or just a common correction in the uptrend.

In any war, there are winners and losers. And it is not just about the U.S. trade battle with China, where the stock indexes display who is who. It is also about the positions of power in Forex. Dollar is leading on every front possible; and the most emerging markets’ currencies are suffering from the most serious losses. Their greatest problems are increase in the US Treasury yield, US massive fiscal stimulus, supporting the impressive results of the US economy growth, and trade wars.

Dynamics of the dollar rate and the emerging markets’ currencies rates


Source: Bloomberg

According to 44% from 59 experts, interviewed by Wall Street Journal, the tax reduction won’t have such strong influence on the US economy in the long-term. 35.2% of respondents expect a little increase in the US GDP, supported by the fiscal stimulus. 11% are confident that the tax reform will slow down the US GDP growth. So, the effect of the tax reform on the US GDP will gradually fade out. Another matter is trade wars.

Investors have expected Donald Trump to announce the expansion the import tariffs on China’s imports worth $200 billion for about a week; however, nothing has changed. According to the Chinese media, Beijing won’t be talking at gunpoint or playing just for defense. If the U.S. doesn’t stop threatening, there won’t be any kind of negotiations. Both sides have reached a dangerous point, and any careless step can have an enormous impact on global economy.

Dollar’s advantage is not only in the US tax reform, impressive GDP rate and high demand for safe-heaven assets, resulted from trade wars. It is also in the weakness if the greenback rivals. A decline in the Euro-area economy growth in the first half-year supported the EURUSD rise as much as the Fed’s monetary normalization. However, I can’t say that the greenback has no soft points. Expansion of the US twin deficit; Donald Trump’s comments; drop in the economic surprise index, also because of a slower inflation rate; and growing risks of recession get investors to be extremely careful before they enter U.S. dollar longs.

Dynamics of the U.S. economic surprise index

Source: Citigroup

When the markets want to buy the U.S. dollar but wait, being cautious, the EUR/USD consolidation looks quite consecutive. The bulls' try to consolidate the euro above the resistance at 1.171 failed, followed by the euro drop down by almost a whole figure due to the strong statistics on the U.S. industrial production, retail sales and the consumer sentiment. EUR/USD seems to go on its consolidation in the trading range of 1.15-1.185.

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Price chart of EURUSD in real time mode

Dollar Wants but Waits

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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