EUR/USD Lacks Direction

EUR/USD consolidation in the range of 1.15-1.185 drags on

If you manage to tame one opponent, all the rest are likely to follow. Canada’s willingness to provide the USA with a limited access to the country’s diary industry was treated as the deescalating of global trade war and encouraged EUR/USD bulls for a counter attack. But their victory didn’t last for long. China won’t necessarily follow Canada and agree with the U.S. conditions. Besides, investors are getting more and more confident in four federal funds rate hikes in 2018. According to CME derivatives, the chances are over 80%.

Dynamics of probability of three and four fed funds rate rises in 2018

Interest-Rate Sentiment

Source: Financial Times.

The highest increase in the average earnings since 2009. The best manufacturing PMI results since 2004. The highest level of new jobs since 2000. What other reasons are needed to prove the strong US employment and the US strong economy, as well as a high probability of the US inflation rate increase? 10-year Treasury yield has approached the psychologically important level of 3%, Treasury Inflation-Protected securities yield is swinging in the range of 2.05%-2.2%, suggesting that PCE is likely to exceed its 2% target. In addition, 2-year Treasury yield, following the report on the US employment, has hit its record high since 2007.

Dynamics of U.S. Treasury yield and U.S. average hourly earning

Earnings And Treasury Yields

Source: Bloomberg

The U.S. securities are still very popular, and the Fed is not going to give up normalizing its monetary policy. Why shouldn’t the U.S. dollar grow strong in such positive environment? Moreover, due to the appeal of the U.S. Treasuries and the U.S. stocks, the respondents of the UBS Asset Management poll suggested that the U.S. dollar share in the central banks FX reserves should hit the level of 71.5% in the next few quarters. The official IMF statistics suggests 62.5%.

What can the euro respond with? No progress in the US-EU negotiations? Jean-Claude Juncker’s willingness to boost the euro-denominated imports? A moderate positive by ZEW German economic sentiment index? Talks that the Italian anti-euro government’s willing to back out? Higher chances of UK-EU agreement on Brexit? All of this is not enough to restore the EUR/USD uptrend. It is necessary that investors should give up on the US dollar, followed by clear signs of the Euro-area economy improvement, provided the political risks are declining.

Meanwhile, the EUR/USD continues staying still inside the consolidation range of 1.15-1.185. The opponents are anticipating the report on the US inflation. A high surge of consumer prices will hardly leave the Treasury 10-year yield at the same level and will support the US dollar. Anyway, it is still too early for the EUR/USD bears to celebrate the triumph.

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