EUR/USD bulls drew the rate above figure 15 bottom amid the eased political risks in Eurozone
The euro is back above $1.15 as Italy announced its willingness to stay in the currency block, Brexit talks are advancing, and the emerging markets’ countries are growing to the U.S. dollar amid the Shanghai Composite increase. The greenback has been also weakened by the concerns about the U.S. sanctions against Saudi Arabia for the death of Saudi journalist. In this environment Brent can well surge higher than $100 per barrel, negatively affecting the U.S. foreign trade.
According to Luigi Di Maio, as long as he is the leader of the Five Start Movement, Italy won’t leave the EU or the currency block. The leader of the League, Salvini noted that Italy is comfortable as a member of the Eurozone and the European Union and there wouldn’t be any plan to leave the euro or the European Union; the Italy’s government is willing to change the rules a little. Those speeches are likely to be aiming at calming down investors, who pushed Italian bond yield driving the Italy/Germany yield gap the widest since 2013. This fact is seen as higher political risks and presses down EURUSD.
Dynamics of EURUSD and Italy/Germany yield spread
Despite the conciliatory speeches of euro skeptics, it is not yet about any signs of a compromise between Rome and Brussels. The Brexit situation is different. There are rumours in market that Theresa May is willing to give up her demands the Irish border; and the EU chief negotiator Michel Barnier says Brexit deal is 90% done. Yes, investors usually expect such news to support the pound; however, the euro will also benefit from the accord reached.
EURUSD bulls have been also supported by the rise of emerging markets’ currencies to the U.S. dollar amid the growth of Shanghai Composite. China’s officials focus the high results (+6.5% Y-o-Y) that indicate the economy’s strength, rather than on a slowdown of Chinese GDP growth to the lowest level for almost a decade. According to the policy makers, the psychological effect of trade wars is stronger than their real influence on Chinese economy. However, over 500 Reuters experts suggest that the GDP rate in 70% of 44 analyzed countries has already reached its limits. They cut down the forecasts for 2019 for 18 countries; it remained the same for 23 of them. I don’t think the EM currencies will break the trends to the greenback; it is likely to be a short-term surge.
The highlights of the week, ending October 26, will be the ECB meeting and the release of the first report on the U.S. GDP in the third quarter. In September, Mario Draghi was quite optimistic about the influence of wages growth rate on the core inflation; in October, the slow progress of the core CPI makes the President of the European central bank more likely to sound hawkish. In addition to the positive expectations for the U.S. economy (+3.4% Q-o-Q), it creates the reasons for EURUSD bears to go ahead as the euro is rising.
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