Growing interest in European equity securities can encourage EUR/USD bulls to go ahead

EURUSD bulls could test the resistance at 1.1435-1.1445 due to profit-taking, drop in consumer confidence index in the USA down to the lowest level since September and the optimism about trade negotiations between Washington and Beijing. The first attack was repulsed; euro, however, is gradually recovering. There are rumours in the market that the USA and China are willing to settle down the argument before their presidents meet at the summit of Asia-Pacific Economic Cooperation leaders in late September. Besides, Wall Street Journal, referring to competent sources, claims that the U.S. administration is not that willing to talk and wants to play for time. By October, it will have grown in power.

The first since June negotiations are planned on August 22-23. At this time, the U.S. second package of tariffs on China’s imports worth $16 billion will come into effect. Beijing has promised to equally retaliate, which will set Washington free for further measures. The next stake is $200 billion. Donald Trump, during his election campaign, promised to settle the matter with China, with which the USA has the biggest foreign trade deficit.

The U.S. foreign trade with different countries

Source: Bloomberg

The markets see the conversation as the conflict easing, which cuts the demand for the major safe-heaven currency. The U.S. dollar is now serving as it.

Closing of EURUSD shorts was supported by a decline in the U.S. Consumer Confidence Index, reported by the University of Michigan, down to 95.3, the lowest level since September. Taking into account a close correlation between the index and the U.S. stock indexes, its dynamics is the first signal of a weaker interest in the U.S. stocks. The demand for the European peers may, on the contrary, increase. The euro drop down to the lowest level for over a year, the ECB ultra easy monetary policy, low borrowing costs are the key growth-drivers for EuroStoxx 600. There is only a single one missing, the restoration of the Euro area GDP former growth pace. Remember, the capital outflow from the euro area to the USA was an important growth driver for the USD index during the spring-summer period.

In addition to the lack of economic growth momentum in the Eurozone, the currency block is still challenged by the danger of policy conflict escalation. According to Bloomberg forecasts, if the anti-euro government in Italy ignores in September the EU requirement for the budget deficit limit of 3% and expands it up to 6% and more, the Italy-Germany bond yield spread, the main measure of policy risk, will be wider to 470 bps, the highest value since the European debt crisis.

Projected gap between Italian and German bond yields

Source: Bloomberg.

Investors believe that Italy won’t be able to satisfy its needs and repay earlier debt; therefore, they are exiting Italy’s bond market. It results in higher interest rates; and the Italian government is asking the ECB to extend QE. I, personally, don’t yet see any preconditions for EURUSD going back above 1.165-1.17, which can be interpreted as a false breakout of level 1.15.

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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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