Lower political risks support EUR/USD bulls

When the market doesn’t expect any progress, good news triggers sharp moves. The EU leaders’ agreement on migration issues sent EUR/USD up above 16 figure base. Reduced flow of refugees shakes the positions of euroskeptics and makes the euro-area less likely to fall apart. The political factor has been rather important in the recent times for Forex pricing, and this time, it supports euro.

Euro bulls wouldn’t have advanced so much but for the market unwillingness to buy out dollar. Yes, the final estimate for the US GDP in the first quarter turned out to be worse than the previous two ones. Economy expanded only by 2%, however, according to the most accurate Wall Street Journal forecaster Macroeconomic Advisers, it will expand by 5.3% in April-June, featuring the best performance since 2003. Atlanta Fed expects 4.5% growth.

Dynamics of the US GDP

Source: Wall Street Journal

The matter is how long the fiscal stimulus will support the US GDP. During the current course of economic expansion, the indicator has risen by 2% on average. The US Budget Committee expects the same for the future growth. As the yield curve is flattening, the recession grows more likely. In this regard, the Eurozone, with its lagging economic cycle and anticipated monetary normalization start, seems a rather appealing zone to invest capitals.

The USD 6% rally since April hasn’t changed the attitude of Bloomberg experts. They expect the US dollar to be 5% down in late 2018, and 11% down – in late 2019. BNP Paribas claims that the current greenback rise is just a cycle rebound against the trend. Credit Agricole bets on the restoration of EUR/USD uptrend due to the US twin deficit and continuing flattening of the US Treasury yield curve.

Dynamics and forecasts for USD index
  
Источник: Bloomberg. 

Source: Bloomberg

Anyway, not everybody shares this opinion. Even if, according to BofA Merrill Lynch polls, most investors are dollar bears, the bank itself has the opposite attitude. If the trade tensions increase, the most pressure will be put on the currencies of developing countries and euro. On the contrary, the conflict easing will return the interest in the Fed’s monetary restrictions. The greenback can do nothing but rise; if 10%-20% of EUR/USD buyer closed their positions, euro would be diving very fast.

I think, the single European currency lacks the drivers to restore its long-term uptrend. Dollar main problem is that the factor of divergence in the ECB and Fed monetary policies is getting less important. Investors prefer to stay aside as they do not clearly understand how to apply it. All of this increases the risks of short-term consolidation in the range of 1.1515-1.1815. The middle-term trading channel is wider, between 1.15 and 1.2. 

 


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Price chart of EURUSD in real time mode

Euro Rescues Migrants

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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