To restore EUR/USD bullish trend, the improvement of European statistics is necessary
The major currency pair continues dozing peacefully in the price range of 1.2215-1.247, waking up from time to time due to the news from the USA, China or the Middle East. Anyway, it immediately falls asleep. We can hardly expect anything else, if Donald Trump, after air strikes on Syria, writes that the “mission is accomplished”; and his top economic adviser Larry Kudlow believes that the United States will manage to avoid trade war with China; the U.S. Treasury Department has been unwilling to admit that China is a currency manipulator for the third half-year in a row.
Despite a significant foreign trade surplus of $375 billion (Mexico, the second in the list, has that of $71 bln), Washington has no reasons to mark Beijing with a burn notice. According to the report of the U.S. Treasury Department, China has substantially reduced its intervene in Forex life in the second half of 2017. It is interesting, there are rumours in the market that China will apply competitive yuan devaluation in case of trade wars. History has shown, this measure will result in nothing good: in 2015, the Chinese currency weakness triggered a substantial capital outflow; and PBoC had to spend about $1 trillion from its reserves to balance the markets.
Both dollar, due to the trade policy and geopolitics, and euro, due to the eurozone economy’s slowdown, continue looking rather weak. The greenback is not supported even by the Fed monetary restriction, including Boston Fed’s president Eric Rosengren’s hawkish speech. According to him, the reduction of budget spending and a tax increase raise the risk that the central bank will lack the instruments to deal with recession in future. Simply put, the rate should be hiked faster than the Fed does. According to BNY Mellon Asset Management, the monetary restriction factor is already included in the dollar pairs quotes; and the USD bearish trend won’t be broken down even if the federal funds rate is increased up to 3% by the end of 2019.
Dynamics of the Fed rate and the USD index
It seems that gradual improving of the eurozone economy will revive the idea of the ECB monetary normalization and will support the EUR/USD uptrend restoration. In fact, everything is not that simple. If we assume that GDP slowdown in early 2018 resulted from bad weather and a flu epidemic, then the above scenario looks quite real. If the reasons are deeper structural factors, including the peak impact of the ECB monetary expansion in 2017, negative from growing rates and strong euro, then, the last year’s rise can well be a common noise.
Fulcrum Asset Management projection for GDP growth in the eurozone
So, investors should focus their attention on the European statistics. Without its improvement, the EUR/USD bulls will find it extremely difficult to storm the resistance at 1.247 and drive the pair beyond the growth limits.
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