Stabilizing situation on the financial markets of the Old World and the growth of political risks in the States create prerequisites for purchases of the EUR/USD
The growth of political risks in the euro area, as expected, helped lower the quotes of the EUR/USD to the area of 1,162-1,165. The agreement between Giovanni Tria and the leaders of the League and Five Stars was signed at the last moment at night. Initially, the Minister of Finance insisted on a 2% budget deficit, Eurosceptics - on 2.4-2.5%. They agreed on the figure of 2.4%. Taxes will be reduced by 15% for 1 million Italians, about 400 thousand people will have the opportunity to retire, including, thanks to the growth of new jobs. The longer the negotiations lasted, the higher the yield of the bonds of the republic increased, and the lower the euro fell. The compromise allowed it to find the ground under its feet.
According to the consensus assessment of large banks, the deficit of 3% of GDP was to expand the spread of the rates of the Italian and German debt markets to about 300 bps. At present, the indicator is at the level of 240 bp, which corresponds to the difference between budget expenditures and revenues of 2.4% of GDP. Thus, the market should calm down, which will support the EUR/USD bulls. Moreover, German inflation in September accelerated to 2.2%, which strengthens the position of the hawks of the Governing Council of the ECB. Head of the Bank of Austria Ewald Nowotny believes that the European Central Bank should consider the possibility of raising rates earlier than currently planned. The German IFO shares his opinion.
Forecast of spreads of Italian and German bonds
Dynamics of European and German inflation
However, one should not feel too optimistic about the acceleration of consumer prices in the Old World. Their main driver in September was oil, while the dynamics of core inflation leaves much to be desired.
Italian political risks, the completion of the QE and rumors about the normalization of the monetary policy by the ECB lead to an outflow of capital from the ETF, which is focused on the European debt market. On the week ending September 26, it was $ 2.7 billion, which is higher than that of the US counterpart ($ 1.7 billion). This suggests a faster growth in the yield of European bonds compared to Treasuries, which is also a bullish factor for the EUR/USD.
The key events of the end of the month will be the release of data on European inflation and the IMF data on the structure of the gold and currency reserves of central banks. Acceleration of the core indicator to 1.2-1.3% y / y and an increase in the interest in the euro from the regulators will support the fans of the main currency pair. According to JP Morgan, the policy of protectionism, trade wars and sanctions pursued by the US administration, which affects both enemies and friends, contributes to de-dollarization. The rest of the world has to diversify the risks associated with financing in the American currency, which, for sure, will affect the structure of the gold and foreign exchange reserves.
In my opinion, the stabilization of the situation in Italy and the gradual growth of political risks in the States as the midterm elections approach in November create the prerequisites for purchases of the EUR/USD from around 1,162-1,165 and 1,156-1,159.
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Price chart of EURUSD in real time mode
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