If the decline in Eurozone economy was seasonal, EUR/USD may stop falling soon
When the market is too carried away with the rates, strong US statistics supports buying out the US dollar. Retail sales, being 0.3% MoM and 4.7% YoY up in April pushed US yields up to 3.09%, the highest level since 2011, because investors are getting more confident in the US prosperous future. Spending continues exceeding inflation, which is good news for GDP. After the release of the retail sales data, Macroeconomic Advisers, the most accurate Wall Street Journal forecaster in 2017, increased the expected US economy’s growth up to 2.9% in the second quarter.
Dynamics of USD index and US government bond yield
Source: Trading Economics
To my mind, the USD rapid growth, started in mid-April, resulted from the combination of a few factors: increased probability of the Fed’s aggressive monetary restriction; easing of trade war concerns; slowdown in the European economy in the first quarter. In mid-May, the chances of four federal funds rate hikes are up at 53%, and just a month ago it was about only 39%. The president’s top economic adviser Larry Kudlow claims that Washington and Beijing are going to enter a deal that will allow cutting mutual import tariffs, making the trade more fair than it used to be. The GDP growth in the currency block member countries slowed from 0.7% QoQ down to 0.4% QoQ in January-March.
Bad weather, strikes and a flu epidemic are blamed by the European Commission and the ECB for the Eurozone economy’s slowing down. The fish rots from the head; so the fact that German GDP declined to 0.3% is taken for granted. The Netherlands and Portugal are performing no better.
Markets don’t stay still; the factor of the European GDP decline is already included in EUR/USD quotes, and it is now crucial on the agenda, what’s next? The fact that the expected economy’s growth hasn’t been changed much proves that the ECB counts on the decline being seasonal. The Governing Council’s representatives play the game “believe your ears, don’t believe your eyes” with investors, suggesting they shouldn’t pay any attention to the recent statistics. Time will show, who is right.
At the same time, euro is gradually losing its advantage that allowed it to finish 2017 with the incredible result of +14% against the US dollar. It is political calm. The Italian Five Star Movement and the Northern League, going to make a coalition, are discussing the details of exiting the Eurozone and threatening the ECB to take an advantage of the QE contradiction to the EU norms about the ban on direct funding by the governments if the central bank doesn’t forgive Rome €250 million of debt.
I still wish to believe that either strong euro or the tension caused by trade war or the highest oil prices since 2014 haven't broken down the Eurozone economy. Improved macro-statistics will lure investors back to the single European currency, if only the politicians wouldn’t be too much. Therefore, the zone between 1.165-1.175 could be rather good to buy EUR/USD.
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.