Eurosceptic government in Italy reduces the political risks of the currency block

The EUR/USD bulls managed to repulse an attack of their opponents on the important support of 1,1535 thanks to the information about the repurchase by the Italian government of its own debts for almost € 1 billion. The Ministry of Finance used the growth of the yield of 2-year securities to 1.35% for purchases and explained this by having extra money. Although there are rumors on market that this way it is trying to deal with the liquidity crisis. Since the Eurosceptics took the lead, Rome repurchased three times, which made the rates for debts fall. Such a dynamics of profitability is perceived by investors as a reduction of political risks in Italy, which extends a helping hand to the single European currency.

Dynamics of the yield of Italian bonds

Source: Financial Times. 

The truce in the trade war between the EU and the US gave a breath of fresh air to European companies. According to a poll of 923 investors, there is an improvement in the current business conditions and prospects for the future: the Sentix sentiment index rose in August from 12.1 to 14.7. In my opinion, talking about restoring a long-term bullish trend for the EUR/USD will be possible only if the political risks of the eurozone are reduced, its macroeconomic statistics are improved, and the US GDP loses speed. The first signs of the former two factors have already appeared, but this is still not enough.

For the dollar, the oxygen is blocked by the inability of the yield of 10-year US Treasury bonds to stay above the psychologically important 3% mark. The Asian accounts are particularly active on the background of the Bank of Japan's unwillingness to make adjustments to the management of the yield curve and the continuing peak of the Shanghai Composite and the yuan. The divergence in the monetary policies of the Fed and PBOC and in the economic growth of the States and China push the USD/CNY in the direction of the psychologically important mark 7. The Chinese regulator, with the help of state banks and raising the mandatory reserve requirements for selling dollar under forward contracts, has already intervened several times trying to bring down the arrogance of the bulls, but the result so far is zero. I'm only concerned with one question: how long will the global financial markets turn a blind eye to what's happening in China? Their scale is comparable with August 2015 and January 2016, but the increased turbulence of world stock indices is nowhere to be found.

Many investors are seriously counting on the strength of the revitalized fiscal stimulus of the US economy. At the same time, the latest study of the IMF states that the reduction of corporate taxes from 35% to 21% will reduce the incomes of transnational corporations in the budgets of other countries by 1.6-13.5%. Japan, Mexico and Britain will be particularly affected. These countries can respond with their tax reform. Is this not a reason to think about buying yen, peso, or pound?

Despite the fact that the first attack on support at 1.1535 failed, the EUR/USD bearsdo not intend to abandon their plans. Moreover, they can let the enemy get closer and use rebounds from important resistance levels at 1,159, 1,163 and 1,166 for a new offensive. 

 

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Price chart of EURUSD in real time mode

Euro has received a gift from an enemy

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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