EUR/USD bulls are massing for an attack to retest the resistance at 1.17-1.1735

When there is a thaw in Europe and it is cooling down in the USA, the previous strong U.S. statistics will hardly draw the U.S. dollar up. The U.S. revised GDP rate at 4.2% in the second quarter triggered...buying out EURUSD. The market doesn’t believe that the largest global economy will go on growing at the same pace as it did in April-June period; at the same time political risks in Italy are easing, trade wars’ influence is weakening and the consumer sentiment in Germany is improving, so the euro is waking up.

Yes, the U.S. GDP rate is up at 3.2% in the first half of 2018 and at 2.9% Y-o-Y; however, its higher pace mostly resulted from temporary factors. For example, the massive fiscal stimulus, whose effect will gradually grow weaker. The first signs of a decline in the economy growth are already seen in the form of the U.S. growing foreign trade deficit and a drop in the economic surprise index down to the lowest level since 2017.

Another EURUSD growth driver, after the GDP report, became the corporate profits. Yes, they are up by 16.1 Y-o-Y, showing the best results for the last 6 years; however, taking into account that the taxes are about 33% down, the result should have been even better. On a quarterly basis, the indicator is down to +2.4%, from +8.2%. And the capital inflow to the U.S. share market was one of the growth drivers for the USD. If the situation is worse than it was originally expected, the foreign demand will substantially lower, having a negative influence on the greenback.

Dynamics of taxes and corporate profits

Source: Wall  Street  Journal. 

Trade wars are thought to support the U.S. dollar; however the market shows that they don’t influence global GDP that much. The evidence is the growth potential of risk assets is limited, responding to positive news, and the safe-heaven assets are growing much stronger, responding to negative. The progress in the NAFTA talks had an insignificant influence on the peso, though Mexico could have suffered the most form the U.S. protectionism. Besides, in the USA, there was set a precedent that makes trade wars be not much important. The U.S. International Trade Commission blocked the tariffs on Canadian newsprint, proposed by the U.S. administration, stating that paper imports didn’t cause “material injury” to U.S. paper producers.

One of the factors, drawing down the euro in May-June period, was withdrawing of foreign investors from Italy’s bond market. Their holdings of Italian debt declined by a net €38 billion and €34 billion. At the same time, the domestic banks bought the government bonds worth €28 billion and €14billion. In July, they bought bonds worth €4 billion; and so foreign investors were not selling the government’s debt that much.

Italian bank’s net purchases of the domestic government bonds

Source: Financial Times

So, the investors’ doubts in the U.S. economy’s continuous growth at a steady pace and the Euro-area positive statistics can encourage EURUSD bulls to retest the resistance at 1.173-1.1735. But first, they need to keep the euro price above 1.165.

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Price chart of EURUSD in real time mode

Euro: the More you Have, the More you Want

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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