Improvement of Germany economic data will encourage EURUSD bulls to continue rally

Economy and markets develop in cycles. The first alternates the periods of fast growth with recessions, the second ones may be sleeping and then suddenly explode. Investors confidence in the end of the US economic cycle suggested they bet on the weakening of the US dollar; however, to achieve a result, the efforts by both sides are needed as a rule. Passive approach of the central banks competing with the Fed allowed the greenback to have been retaining its shine for a longer time than it could be expected. This has also became the reason for a long period of low forex volatility. Nothing can last forever, can it?

The EURUSD pair has been trading in the range of 1.12-1.16 for more than half a year already; and the volatility of major currencies in Forex, according to JP Morgan research, has dropped to the lowest level since 2014. Canadian Imperial Bank, Morgan Stanley and Scotiabank suggest that it can’t go on like that forever. Investors are too confident that the Fed should retain the federal funds rate at 2.5%, and the ECB should start normalizing its monetary policy. If the economic data in the euro area and in the U.S. are improving, everything will turn upside down.

Dynamics of Forex volatility

Source: Bloomberg

They are opposed by both Chicago Fed leader Charles Evans and Deutsche Bank. The first really hopes that the central bank will tighten its monetary policy before the autumn of 2020 and will raise the interest rate again in 2021. Deutsche Bank doesn’t suggests a recession in the next three years and claims the short-term yield curve inversion to be a false breakout, doesn’t expect the Fed to continue normalization and recommends selling the U.S. dollar. Speculators, however, ignore the advice. They have boosted the greenback longs up to the highest value since 2015. Can they be ignoring it just for the time being?

In my opinion, the reasons for low Forex volatility are not only in the passive attitude of central banks, but also in a gradual progress of the situation with trade battles. Donald Trump claims that the U.S. will still win, doesn’t matter whether the deal is made or not; and the media are gradually discovering some new information about the US-China trade talks. Reuters reports that the U.S. is willing to make concessions in the issue of China’s subsidies to the state-owned enterprises; and Bloomberg writes that China weighs the US request shift tariffs on goods worth $50 billion. The U.S. negotiators want to present it as the victory of the US farmers, however, they are not willing to cancel all the tariffs.

Along with trade wars and the publication of China GDP data for Q1, a hot topic in Forex is Germany. Everybody understands that the challenges of German economy, as the European leader, result in troubles for the entire Euro Area. With this regard, the hopes of Bundesbank for a gradual recovery of German GDP growth in the second half-year, the EU confidence in the trade agreement on the cancellation of U.S. import tariffs on the industrial goods before November 1, as well as strong report on the ZEM German consumer sentiment index in April (the indicator may exit the red zone for the first time in 14 months) may encourage the EURUSD bulls for another storm of the resistance at 1.132-1.1325.   


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Price chart of EURUSD in real time mode

Euro took Germany at gunpoint

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