EUR/USD is up above figure 17 bottom

Confusion inside the White House, doubt that the USA will win the trade war, drop in global stock indexes and Treasury yield enabled EUR/USD bulls to hold 1.1645 and go on their attack. Rumours that Donald Trump is going to block the investing of Chinese companies into the US technological industry to prevent Beijing from becoming a global leader in 10 broad areas of technology, including information technology, aerospace, electric vehicles and biotechnology sent S&P 500 down and made investors diversify their portfolios in favour of safer assets.

The market was rather nervous about the argument between Steve Mnuchin and Peter Navarro. The Treasury Minister announced that the restriction would affect not only China, but other countries as well. The president’s trade adviser stated exactly the opposite. The White House seems to have serious differences of views, rather than a common strategy. Especially since some US companies, to Donald Trump’s surprise, prefer to give up. The EU responded to the US threats of 20% tariffs on the car imports by its willingness to impose new tariffs worth €10 bn. According to Harley-Davidson, it would cost the company about $100 mln, so it discusses the shifting of production from the USA to India, Brazil and Thailand.

Trade conflicts resulted in a decline in global MSCI; Treasury yield curve continues flattening. Investors wonder why primary dealers and commercial banks continue boosting their holdings of Treasuries. Do they really believe in the increase of 10-yer bond yields higher than 3%?

Dynamics of yield curve
 

Source: Bloomberg.

Dynamics of holdings of Treasuries

Source: Bloomberg

Does it mean that the EUR/USD uptrend is going to restore? I think it is still too early to speak about that. It can happen, provided global economic growth synchronizes. It is remarkable that, according to BofA Merrill Lynch, dollar has recently been more sensitive to the Eurozone data than to the US statistics.

Influence of economic surprise index on EUR/USD

Source: Bloomberg

According to the poll of Absolute Strategy Research among 214 managers of the assets worth $4.1 trillion, respondents are losing their confidence in the prosperous future of global economy. Global business confidence index has dropped to its lowest level for the past four years. Besides, the experts expect the US equities to be ahead their foreign counterparts during the next 12 months.

So, trade wars distracted investors’ attention from the divergence in the ECB and the Fed monetary policies, discouraging them from selling euro against the US dollar. To restore the EUR/USD uptrend, they need regular positive macroeconomic statistics on the Euro-area. I still stick to my forecast for the pair’s middle-term consolidation in the range of 1.15-1.2


 


 

Who Framed Dollar?

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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