EUR/USD: Dollar Pleases Markets

EUR/USD bulls are supported by investors’ optimism about U.S.-China trade-war truce.

When investors rush to realize the motto “buy everything else”, even the euro that is not so strong can attack the dollar, getting weaker by the day. The U.S.-China trade war truce encourages speculators to sell the U.S. dollar for at least two reasons. First, they used to think that the U.S. will suffer from protectionism less than other countries; and so, they were buying USD amid the leading US GDP rate over the global index. Second, import tariffs increase the inflation rate and create preconditions for the Fed’s monetary restriction. The conflict easing deprives the greenback of its main benefits.

The markets are excited and optimistic, they believe China should provide a contribution as a loser in the trade war. The U.S. administration requires from China not some vague promises, but real actions. It is about $1.2 trillion of additional trade duties and strong confidence that China should also “reduce and remove” tariffs below the 40% level that Beijing is currently charging on US cars. The matter is that the negotiations may not go on in the way Washington would like. If the U.S. economy is still strong by the time it’s been understood, that will result in lifted tariffs. If, on the contrary, the US GDP growth is slowing down, Donald Trump will need somebody to put the blame on. Another round of U.S.-China trade war is inevitable in the February-March period, until then, the markets might be positive.

The greenback’s problems are associated not only with Buenos Aires. Investors believe the Fed’s monetary policy to be too tight; and so the US yield curve is falling down towards its 11-month lows. The indicator used to quite accurately signal the recession in past; therefore, Dallas Fed President Robert Kaplan sounds quite reasonable, urging caution on further rate rises. As well as the warning Minneapolis Fed President Neel Kashkari that further increasing of the federal funds rate will drive the U.S. economy to recession.

Dynamics Of U.S. Yield Curves

U.S. Yield Curves

Source: Bloomberg

The euro was also supported by the Governing Council hawk Jens Weidmann. According to the Bundesbank president, the ECB shouldn’t waste time and start normalizing its monetary policy as soon as the incoming data provide the corresponding signals. Maintaining very loose monetary conditions for too long carries risks and could result in excesses in the financial system. So, the EUR/USD is likely to head up amid strong statistics on the currency block.

However, it should be born in mind that investors are anticipating the U.S. employment report, suggesting positive forecasts, and the FOMC meeting, when they are likely to raise the interest rate. It is not reasonable to sell the U.S. dollar ahead such important events. I recommend expecting the report on the U.S employment. Even if the data are as good as expected or better, the greenback won’t benefit that much from this. Meanwhile, the EUR/USD bulls are targeting the former levels – figure 14 base, and the resistances at 1.1445 and 1.147.

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