Open EUR/USD positions according to the Brussels’ response to Italy
When the US stock indexes are losing all the positions, reached since early 2018, oil is falling down to the yearly lows and the demand for safe-heaven assets is rising fast, there are arising doubts in the good state of global economy. JP Morgan notes that the U.S. low unemployment rate, higher wages growth and inflation rate, high prices for equities and corporate debt, along with the tightening of the Fed’s monetary policy, are typical features of the final stage of the economic cycle. With these features, the expansion hasn’t ever been going on for more than two years. The bank estimates the chances of the U.S. economic recession during the next twelve months as one to three.
Dynamics of S&P 500 and U.S. Treasury yield
According to Minneapolis Fed president Neel Kashkari, preventive hiking of the federal funds rate is a direct way to economic recession. Soon end of the economic cycle and growing probability of a slower monetary restriction are strong arguments for weakening the U.S. dollar. The situation is worsened by Donald, who doesn’t cease criticizing Jerome Powell and his colleagues.
Besides, it should be understood that the S&P 500 drawdown results not only from domestic factors alone. The commodity market weakness signals the problems of global demand and GDP. When about 40% of the U.S. corporate income is connected with foreign markets, the uncertainty around Brexit and Italy, along with the emerging market problems, can result in the sales of the U.S. equities as well as the tightening of the Fed’s monetary policy. In general, lower global risk appetite increases the demand for safe-heaven assets, including the U.S. dollar.
Dynamics of safe-heaven assets
Source: Financial Times
Even if the greenback’s middle- and long-term outlook doesn’t seem to be very bright, the matter is that no currency can replace it now. As long as the UK is going to face messy Brexit, and the EU-Italy conflict is threatening the entire European bond market, Swissy will be taking an advantage of the territorial principle of the demand for safe-heavens. The yen performance, for example, is not that significant. Asia is far and the Japanese investors are surprisingly loyal to the U.S. securities.
Most European currencies are extremely vulnerable to the unfavorable political environment. The current uncertainty of global economy, including, trade wars and the OPEC agreement to reduce oil output, make investors cash out their assets. As there is hardly anything interesting in the economic calendar, the market will be focused on the news from Brussels. The EU tough crackdown on Italy may result in a wider gap between Italian and German bond yields, followed by the euro dive down to $1.13. On the other hand, if investors see the EU willingness to compromise, the EURUSD bulls will have enough force to draw the pair towards 1.1515.
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Price chart of EURUSD in real time mode
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