Amid the escalation of the conflict on the Korean peninsula, the main currency pair quite logically was overperformed by the franc, the yen and gold, which made both the bulls and the bears unspeakably happy. While the entire financial world is discussing Donald Trump's skirmish, and Secretary of State Rex Tillerson's and the Beijing's attempts to smooth it, one can put their own thoughts in order and speculate on the prospects for EUR/USD. Let the media headlines be flamboyant with the comparisons of the current conflict with the events of 1962 around Cuba and remind of the 72nd anniversary of the bombing of Nagasaki, let the dollar and the euro be off the front pages - who ever doubts that they will return there soon?


Geopolitics led to a short-term consolidation of EUR/USD in the range 1,169-1,177 amid the growing demand for safe haven assets and a decrease in the yield of US and German bonds.


Dynamics of the yield of US and German bonds

Will the dollar break its own serve?

Source: Trading Economics.


According to Credit Agricole, the convergence factor in the monetary policy of the ECB and the Fed and the associated spreads of the public debt markets do not support the continuation of the EUR/USD rally, so speculators use the pair's growth to take profit on long positions, which increases the risks of correction. BTMU believes that its reason is the incoming evidence that the US economy after a slowdown at the beginning of the year returns to its trend at just over 2%. The bank considers the rollback potential to be limited even if the dollar looks oversold at current levels.


On the contrary, Barclays and TD-Bank are confident that the EUR/USD bears are quite capable of developing their success. The former company claims that markets underestimate the probability of the Fed having the third go at the rates, while the latter says that according to its existing model, the euro is the most overvalued G10 currency and is quite capable of falling to $1.14, where investors should start forming long positionss.


In my opinion, the development of the correctional movement will depend on releases of data on producer prices, core inflation and consumer prices scheduled for August 10-11. Pigeons of the Fed believe that the use of new technologies, increased competition and reduced profitability put pressure on prices. Hawks, on the contrary, adhere to the idea that the slowdown in PCE is due to temporary factors, while the fall in the USD index, the rise in import prices and a strong labor market will make inflation grow. Which of them are right? The statistics to be released shortly will answer this question. Positive data will boost the chances of the federal funds rate being raised and support the EUR/USD bears dreaming of the rollback in the direction of at least 1.1625-1.165.


As for the euro, its strengthening hardly makes it possible to count on the hawkish rhetoric of Mario Draghi in Jackson Hole. Probably, it's too early to get rid of cheap money policy: according to IFO Institute studies, in which more than 4,000 companies took part, German banks increasingly burdened with problems of negative interest rates on deposits from the ECB began to apply them to their clients. And 11% of the latter were forced to send money for capital investments;

Will the dollar break its own serve?

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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