EUR/USD bears managed to resist their opponets’ attack due to several factors. The Fed’s attempts to remind of itself; The USA Treasury Secretary Steven Mnuchin’s assurances that the differences in draft tax reform bills of the Senate and the House of Representatives are not so crucial, and a compromise variant will have been adopted by the Congress even before Christmas. Major currency pair was ready to test the resistance at 1.169, but bulls were discouraged due to the Treasury Secretary’s optimism and the Philadelphia Fed president Patrick Harker’s willingness to raise the federal fund rate in December despite week inflation dynamics.
In Fact, the factor, already included in the quotes, can’t be bearish for EUR/USD. The derivative market is 97% sure that the Fed will restrict the monetary policy in December. At the same time, the chance of three raisings of the rate during the next twelve months are 41% because of uncertainty of inflation and the fiscal reform prospects. Simply put, until there are additional signals, CME derivatives won’t believe in the realization of FOMS September’s projections of three monetary restriction acts in 2018, which is a strong dollar deterrent.
Mnuchin is sure in the tax reform adoption by the Congress, but BofA Merrill Lynch notes, market consensus suggests that it won’t be possible before the end of the year. According to the bank research, asset managers have been selling greenback mainly against euro and yen since spring, and strong statistics doesn’t support the American currency because of low chances of FOMS plans implementation in 2018. Alongside, the lack of trust in long-term prospects for the USA economy and the hopes that the Fed monetary normalization will go on, cause the bond yields curve to continue going down. Investors are actively buying out 10-year bonds and selling 2-year ones, which draws the USA to the point, followed by recession.
Dynamics of the USA Treasury yields.
Eurozone, on the contrary, is only in the middle of its economic cycle. According to Credit Suisse and Oxford Economics, it is entering its golden age, and most of leading indicators show that the restoration will continue. The European Commission raised its forecasts for the currency block GDP growth in 2017 from 1.7% up to 1.8%, and in 2018, from 1.8 up to 2.1%. Bloomberg experts have raised their estimates for the 8th time this year. The growth by 0.6% quarter-on-quarter in the third quarter indicates that the economy is growing faster then the trend, and the Governing council member, Benoit Coeuré asserts that its current period is the best in euro history.
The European Commission’s forecast for Eurozone GDP and inflation
At the same time, there is still the principle “strong economy – strong currency”. Euro will demonstrate its power already in December-February, as the ECB will reduce asset buyout within QE, and the asset mangers and hedge-funds are well aware of it. While EUR/USD quotes are being held above level 1.164, bulls hope to continue the race.
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