Main currency pair is slowly going down, being closed in the red zone during four trading days in a row. Investors are unwilling to sell euro, perfectly understanding its “bullish” long-term prospects. Unfortunately, nobody knows, how deep EUR/USD correction can be, so may be it’s better to hang on to the temporarily losing currency? It’s like getting rid from old stuff: a thing seems to be useless, but it’s likely to come in handy in future.
In my previous articles I enumerated four drivers of euro strengthening in 2017. It was about decreasing political risks, GDP growth, capital inflow to the Old World’s stock markets and the ECB monetary normalization. At the end of the year the system started to fail. Germany has been without the government for more than two months already, which concerns investors, worsens business activity, sets back the Eurozone economy and arouses doubts in assets managers’ minds.
Dollar looks more attractive than euro in December. The tax reform is advancing, GDP is likely to grow up to 3% and more in the third quarter in a row, and the Republicans’ control in the Congress makes us believe that the national debt ceiling issue will be settled. Even if with the falling flag. Yes, there is U.S. yield curve, indicating the recession. Yes, S&P Global warns, that the fiscal incentives application, reduction of tax revenue by $1.5 million and the increase in the budget deficit of $1 trillion during 10 years will lead to credit-rating downgrade, but it’s about the long-run!
Yield curve dynamics in the USA
Source: Financial Times.
The USA rating was downgraded once. In August, 2011. Then, everybody rushed to the safe-heaven currencies, including dollar, which strengthened its rate. As for yield curve, its dynamics shows the combination of two factors: on the one hand, investors are sure, that the Fed will continue raising the rates, on the other hand, even the tax reform doesn't guarantee the prosperous future of U.S. economy.
We've got used to greenback, being sensitive to treasury yields, which, in their turn, are sensitive to the statistics on the labour market and inflation. Besides, the surprising core PCE for the last 12 months explained 58% of 10-year bonds movements within 2 hours after the data release. The debt market’s response to employment is far less significant– 6%. And for the last two years, the figures are directly opposite: 11% and 46%. Could dollar and bonds become insensitive to non-farm payrolls? It can’t be otherwise, as the Fed is confident in the labour market and at the same time expresses concerns about inflation. Investors are trying to understand the central bank’s position, that is why the most important indicator in Friday’s report has been average wages for a few months in a row.
EUR/USD bears continue controlling the situationl, and as long as the pair quotes are below 1.1845, their opponents are unlikely to response.
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