The US mid-term elections spared the EUR/USD bulls a few weeks to have a rest
The Democrats’ victory has not only divided the congress, revived the hope for the return of globalization and Old America, it has also limited the US dollar’s growth potential. The idea of boosting the fiscal stimulus and 10% tax deduction for the middle class is up in the air; and it could become a new driver for the USD in 2019. The Donkeys will hardly want to further spur the economy that already looks overheated. Therefore, the risks of the economy cycle finishing, as well as the dollar’s uptrend and Donald Trump’s rule, will be increasing.
Results of the US midterm elections
Source: Financial Times
Politics has blended with the Forex life, so, investors have adapted to it and developed some new strategies. An upcoming important event always suggests uncertainty; however, when the result is known, the time for the former drivers comes. In case with EURUSD, it is about central banks’ monetary policies, trade wars and Italy.
Rome hasn’t yet responded to Brussels’s requirement to rewrite the draft budget with 2.4% debt; it looks like calm before a storm. The Italian policy makers claim to have no alternative plan and strongly believe that the Italy’s GDP rate will reach 1.5%. The idea doesn’t look real, as the Italian economy produced zero expansion in the third quarter; the composite PMI was below the critical level of 50 in October, which is the worst performance since late 2013. It is less than two weeks before the volcano eruption, and the euro may perform heroism until then.
Dynamics of Italy’s PMI
Source: Financial Times.
The export-led euro area got a breath of fresh air, as the US-China trade relations seem to be improving, and the US mid-term elections are over. Both events support the confidence in the shift from protectionism to globalization, which should have a positive effect on international trade. Another matter is whether the meeting of Donald Trump and Xi Jinping will really put an end to the trade war. I, personally, don’t think so. But the markets, just like humans, often indulge in wishful thinking; therefore, the EURUSD bulls have another reason to go ahead until late November.
The FOMC meeting in November will show how fast they will go. Once the Fed emphasizes in the accompanying statement that the US inflation in autumn has slowed down, investors will see it as dovish rhetoric and start selling the dollar off. Based on the highest net long USD bets since 2017, the EUR/USD should be expected to be rising fast towards 1.15 and 1.158. On the contrary, if the Fed is optimistic about the US GDP and employment, expresses its willingness to return to tight monetary policy in case of necessity; it will be seen as hawkish. The EURUSD bears will be able to drive the quotes below figure 14 base, but I don’t think it will last for long. Remember, the euro has a few spare weeks to enjoy the illusion of soon trade wars’ end and the calm before the Italy’s storm.
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