EUR/USD bears are going to storm the support at 1.15-1.151

EUR/USD bears managed to draw the pair’s quotes down below figure 16 base due to the increased political risks in Germany, the ECB frustration at euro value, easing of the USA pressure on China and China’s willingness to stabilize its foreign exchange market. The US administration announced it would solve the issues of investing into the national technology industry by means of the existing practice, rather than by new restrictions. It makes no distinctions between China and other countries. Steve Mnuchin seems to have stood up his own position. He is an opponent of strong pressure on Beijing, as he believes that this approach will deprive Washington of an important ally against South Korea.

The conflict deescalation drew the Treasury yield up, which is seen by investors as a strong argument for the US dollar rise. Especially since China understands that it can’t stop Donald Trump’s protectionism by devaluing yuan. It’s more trouble than it’s worth. In this context, hedging cost becomes higher for non-residents, so they are going back to dollar.

Dynamics of dollar relationship with US Government bond yield
   

Source: Bloomberg

Dynamics of the spread between yuan volatility and S&P 500

Source: Bloomberg

The People’s Bank also understands the results of the national currency devaluing. The regulator, by means of controlled institutions, interfered with Forex situation once USD/CNY had broken through the important level of 6.6. So, China has shown to the USA twice how it can respond to the protectionism. It reduced Washington’s appetite. However, though it is somehow eased, the conflict hasn’t been solved and is going to shake the financial markets in future.

In addition, the euro is pressed down by the rigid position of Angela Merkel’s ally, Christian Social Union. It threatens national border controls in Bavaria if its requirement to reduce the number of migrants isn’t met. The ECB in its monthly bulletin has reported that the strong domestic demand in the euro-area still reduces the impact of euro devaluing on the inflation rate. Nevertheless, the strong single European currency is setting back consumer prices growth. The regulator seems to be still dissatisfied with the EUR/USD current rate, which is a strong bearish factor for the pair.

The market is anticipating the report on German’s inflation for June. According to Bloomberg experts, CPI will remain above the important level of 2%. The longer will it stay there, the more likely is the European consumer price index to increase later this year higher than the ECB expects (+1.7%). If so, the plans to retain the interest rate could be changed. On the contrary, poor statistics will encourage EUR/USD bears to storm the support at 1.15-1.151 and draw the quotes lower.

Euro Steps on Thin Ice

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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