EUR/USD is trading within the narrowest trading range ever

Te major currency pair is staying still in the narrowest trading range over the entire history of the euro existence. EUR/USD volatility is down to the least level since 2014 and is considerably lower than the long-term average value. After all, it is featured by most financial assets. Markets are napping due to the Fed’s willingness to make a long pause in the monetary normalization process. Although the central banks explains its policy by the turmoil in stock markets and the weakness of foreign demand, it may well be just willing to live through the first quarter, when the US GDP is traditionally weak. It is said to get back to the idea of the interest-rate hike once the first half year is over. Perhaps.

Current and average volatility of financial instruments

Source: Financial Times

In the meanwhile, the US dollar is getting stronger due to the increase in the US bond rates. Investors are getting rid of Treasuries amid the steady GDP growth by 2.6 Q-o-Q in Q4, concerns about a default, resulted from challenges of the national debt, as well as amid a low risk of consumer prices growth. Inflation expectations, assessed by the 10-year Treasuries and TIPS yield gap, are at 1.95%, which is below the Fed’s PCE target of 2%. The demand for Treasury Inflation Protected Securities is going down, which is expressed in a smaller capital flows into U.S. TIPS exchange-traded funds.

TIPS Dynamics of capital flows into U.S. TIPS exchange-traded funds

Source: Wall Street Journal

Strong domestic demand and low inflation rate are basically good for the US economy. If the report on the US employment in February shows an increase average wages growth, then the increase in real household income may become the basis that the White House expects to draw the GDP rate up to +3% in 2019. The US economy still looks quite strong. Especially compared to the euro-area and China. Besides, if Beijing fails to achieve the V-shape rebound of China’s economy in 2019 by means of the fiscal and monetary stimulus, the euro-zone, along with the euro, may suffer. According to Eurizon SLJ Capital, in this case, the euro could drop down to $1.05. It is lower than the most pessimistic forecast by the Bloomberg experts for late 2019 (1.1$). Median forecast suggests the EUR/USD growth up to 1.19$.

The euro bulls can be discouraged by the trade conflict escalation between the U.S. and the EU. Donald Trump demands the greater market access for the US agricultural goods in the euro-area; if the EU doesn’t agree, he is willing to boost the import tariffs on European cars. The farm industry is of key importance for the euro-area, and Brussels is willing to adequately retaliate.

In the short-run, the EUR/USD rate can be moved by the release of the U.S. Non-Manufacturing PMI, the ECB meeting and the report on the U.S. labour market. Investors expect lower Governing Council’s forecasts for inflation; however, the split inside the council about the LTRO feasibility will be seen as a bullish factor for the euro, which is hardly moving within the trading range of $1.125-$1.15


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Price chart of EURUSD in real time mode

Who is to wake the euro up?

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