EUR/USD has closely approached 10-month low
Strong economy – strong currency. The massive fiscal stimulus resulted in the growth of the US retail sales at the highest pace for the last six years; Atlanta Fed expects the US GDP growth at 4.8 % Q-o-Q, which will be the best result for almost 4 years. New York Fed’s president William Dudley, leaving the Chair soon, expects the Fed to raise the its rate above the neutral level of 2.9%, so, the monetary policy will be considered to be strict. At the same time, the Eurozone, following the impressive start in 2018, doesn’t seem to be restoring in the second quarter; the Governor of the National Bank of Belgium Jan Smets claims that the ECB could extend quantitative easing program in case of any shock. It is the contrast that makes an impression! That presses EUR/USD down towards its 10-month low.
Dynamics of the US GDP
Source: Wall Street Journal
If the ECB’s tries to reason the Eurozone GDP decline in the first quarter by bad weather, a flu epidemic or strikes were working in April-May, now there are more and more talks about bad influence of strong euro, reduced amount of QE and rising oil prices. Since February, the rally of Brent and the USD index drew oil prices 30% up for the currency block’s consumers. It is clear now, why the ECB is unwilling to hike the interest rate.
EUR/USD could be falling faster, but for trade wars. Beijing decided to hit back, after Washington had imposed tariffs on the import of more than 800 Chinese goods. China’s import tariffs affect 659 items, including agricultural, seafood and energy products. Donald Trump claimed to impose more tariffs, worth $100 bn if China retaliated. Now, the US president has nothing to do, but to fulfill his promise.
According to Blomberg Economics, trade war will have a limited influence on economic expansion in both countries; but if the trade conflict weakens business and consumer confidence, everything is going to be different. According to ex-Trump adviser Gary Cohn, trade war can destroy the impulse, business got from the tax reform. In 2017, China’s current account surplus amounted to $165 bn; in 2018, according to Standard Chartered, it reduced to $139 bn. If the USA implements its plan to cut its foreign trade deficit by $200 bn, whole or in part, Beijing is going to face the deficit. And it may result in yuan drop and capital outflow.
So, different pace of the US and European economic expansion, divergence in monetary policies of the Fed and the ECB, as well as rise of euroskeptics in the Old World that should be interpreted as escalation of political risks, are strong reasons to sell euro. If May’s low is renewed, the pair is likely to continue falling down towards 1.14 and 1.13. Constraints are trade wars and gradual improvement of macroeconomic statistics in Eurozone.
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