Soft Brexit can support EUR/USD bulls

A strong businessman won’t be always a strong president. It is hard to move from the corporate level to the macro economy; and the stick and carrots methods often fail to be efficient. Donald Trump was aiming at cutting down the foreign trade deficit, as the priority objective of his policy. During the first seven months of 2018, the amount reached $337.9 billion, the widest for the past seven years. It has increased by $22 billion during the year. It seems that the USA doesn’t get use of either import tariffs, or the revision of the earlier trade deals, including NAFTA. The strong domestic demand and the opponents’ retaliatory measures are expanding the US foreign trade deficit. May be, it’s high time the US president changed his tactics?

The US international relation is not a single area, where Trump fails. No sooner had the Democrats criticized the US president, claiming his fiscal stimulus to be useless for increasing the average wages, when the U.S. administration suggested a new calculation methodology. It includes the factor of the population aging and shows that the real amount of compensation was 1% up for the first quarter; which is much more than +0.1%, reported by the US Department of labour. The matter is that such wages dynamics should be followed by the higher inflation rate, and so, the Fed will have to increase the interest rate. Donald Trump won’t like it of course. A vicious circle!

Anyway, the dollar’s problems are its own troubles; the euro has enough of its own. The single European currency, due to a larger share of export in GDP than that of the USA, and as its economy is led by the processing of commodities, the euro-area depends on the emerging markets’ situation much stronger than the U.S. It is proved by the a closer correlation between the European MSCI and the MSCI EM, the indicator is up to the record 0.7, the highest level for the past seven months. The link between the MSCI US and the MSCI EM is, on the contrary, down to – 0.1.

Dynamics of correlation between MSCI Europe index and MSCI EM index

Source: Bloomberg

According to JPMorgan and BlackRock, the bandwagon effect will result in more EM sales, being a bearish factor for EURUSD. The majority will either continue selling off the emerging markets most toxic assets, or it will affect the whole class in general. And there is also Italy, with the draft budget by euroskeptics. If the deficit expands up to 3% and more, it will widen the gap between Italian and German bond yields, increasing the political risk. However, BNP Paribas expects the indicator to be at 2% or less, which, on the contrary, will support the euro.

The current EURUSD surge results from the events in the Euro-area. The talks that Germany is willing to accept from the UK a less detailed deal on the future economic and trade relations have brought back the hope for a deal between Britain and the EU. Brexit, like trade wars and other factors, was thought to be a barrier for the euro-area economic recovery. The door may be opened wider, which, provided the dollar retains its advantages, will make the euro more likely to continue consolidating in the range of $1.15-$1.185.

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Price chart of EURUSD in real time mode

Soft Brexit can support EUR/USD bulls

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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