EUR/USD bulls can’t go ahead because of poor statistics, political risks and trade wars
The U.S. trade war with China can hardly end if the USA can’t reach an agreement with Canada. The deal that used to seem quite real hasn’t, in fact, been made. The countries have put off the negotiations; and Donald Trump threatens to leave Canada behind on NAFTA if it doesn't sign the agreement, suggested by Washington. One can hardly expect the trade war truce between the USA and the EU to be long, as the U.S. president claims that the Eurozone is manipulating the currency just like China. According to the governor of the Bank of Finland, Olli Rehn, the greenback rival currencies are getting weaker due to trade wars, rather than due to the central bank deliberate activities.
Investors’ concerns about growing trade tensions work to dollar’s advantage. The difficulties in the negotiations between Washington and Ottawa have drawn the U.S. dollar up against major world currencies. In particular, against the already weak euro. I’ve emphasized many times that to restore the EUR/USD uptrend the greenback’s weakness alone is not sufficient. The positive statistics in the euro-area is necessary, and the European economy is not going to improve. The core inflation is not changing from 1%, being a strong argument for keeping the ECB rate low at least through September, 2019. It is still unclear whether the Fed will pause the monetary normalization cycle. If it doesn’t, the divergence will continue working to the EURUSD bears’ advantage.
Dynamics of core inflation and the ECB interest rate
Source: Trading Economics
Although the outflow of foreign capitals from Italy’s bond market is slower in August, compared to June-July period, there are still political risks in the Euro-area. There are rumours in Forex, when the compatriot Mario Draghi leaves the post of the ECB chief, Rome won’t receive the former preferences any more. In addition, after Italy’s rating outlook had been lowered by Fitch to negative from stable, they started selling more Italian assets and euro. The agency noted that Italian debt to GDP ratio is at 131.8%, which much higher than the median indicator of 37.8% for the countries rated “B”. Growing budget deficit and the higher debt amount worsen its outlook and the potential of anti cyclical budget policy. It suggests that the euro-skeptics are going to have problems with the draft budget.
So, it is too early to expect the revolution for EURUSD, when the government can’t rule in the old way, and the people don’t want to live as they used to. Yes, the U.S. dollar is not so strong as it used to be in the April-August period, the euro bulls don’t have enough power to change the situation radically. As there isn’t going to be any revolution, the EURUSD will go on testing the borders of the consolidation range. I think the channel of 1.15-1.185 looks too narrow for the major currency pair. So, the borders can well be changed in the near future.
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