Capital outflow from the Euro-area to the USA encouraged EUR/USD bears to press euro quotes towards the zone of 13-months lows

Positive data on German economy growth hasn’t somehow discouraged EURUSD bears. Investors used the information about speeding up of German GDP growth up to o.5% Q-o-Q in the April-June period to sell euro on the price rise. On an annual basis, euro area economy has speeded up from 1.5% up to 1.8%, but hasn’t reached 2% growth rate, that was reported in 2017. Due to trade wars and the turmoil in Italy and Turkey, Germany is running out of power. The euphoria of German exporters is gradually fading away, and the markets start dwelling upon the extension of the ECB QE program.

Dynamics of GDP growth in euro area

Source: Bloomberg

According to the president of the Italian Budgetary Committee in the Parliament Claudio Borghi, the European central bank should provide a shield form the bond markets of the Eurozone countries to prevent it from falling apart. It is about the interference with Italian bonds in case the Italian yields surges amid the new about the budget bill from the anti-EU government. Such protection can be created by means of extension of QE program or increasing its volume. Investors were napping, without thinking of possible boosting of the ECB stimulus package; and so, the information, associated with this idea triggered another wave of EURUSD selloffs.

The divergence in monetary policies has been the main euro pain for a long time. Even if the price fall on the US imports in the June-July period has pressed the chance of four federal funds rate hikes in 2018 slightly down, few doubted that the Fed will go on monetary normalization cycle. Moreover, according to the US-German bond yield gap, there is plenty of room for EURUSD going down.

Dynamics of EUR/USD and US-German bond yield gap

Investors can make quite a profit on the difference in the interest rates amid dollar growth. For example, carry trade efficiency for USDJPY in the April-June period was 4.9%.

The appealing Treasury yields are not a single advantage of the U.S. dollar. Since March, 2009, S&P 500 has been 320% up; and, if dollar rally continues, it will be the second after the impressive rise in the period of 1990-2000. In addition, investors are getting more confident in the prosperous future of equity notes: according to BofA Merrill Lynch, the proportion of equities in the portfolios of 243 players, managing $735 billion, is up to 19%. It is about the best results since January, 2015. 67% of respondents think the USA to the most promising region in the world, according to corporate profits. The best performance for 17 years.

Therefore, dollar continues getting use of the advantage, like strong economic growth, the Fed’s monetary normalization and the capital inflow to the securities market. In addition, the rumours about boosting the volume of QE press EURUSD quotes towards the zone of 13-year low. Bears are determined to continue drawing euro quotes towards 1.118-1.12, and they opponents do not have enough arguments to retaliate.

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Price chart of EURUSD in real time mode

Euro Turns for the Worse

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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