EUR/USD is up above 1.14 as speculators are closing U.S. dollar positions.
The market is driven by the Fear. Any slightest bearish drivers for the U.S. dollar get the speculators, who have raised the dollar net-long positions up to the highest levels since early 2017, to close them. Hedge funds ignore positive and don’t pay attention to the dangers for the euro; it suggests that the major currency pair is rising without any fundamental reasons. Allegedly dovish comments by the Fed’s representatives and disappointing statistics on the US industrial production drew the EUR/USD rates up above figure 14 bottom.
Dynamics Of USD Rate And U.S. Dollar Speculative Positions
Source: Bloomberg
Investors have been scared by the Federal Reserve Vice Chairman Richard Clarida, who said central bank's benchmark short-term rate is getting closer to a "neutral" level of 2.5-3.5%, the central bank’s further policy depends on the input data and that the risk of global economy’s slowdown is increasing. The market has immediately remembered about the speech by Atlanta Fed president Raphael Bostic that the U.S. economy may not create undesirable inflation pressure; and about the fears of Dallas Fed president Robert Kaplan about the influence of slower GDP growth in the European and the Asian countries on the U.S. economy. Doesn’t it matter that Clarida was calling for retaining the current pace of monetary normalization, announced the US economy to be strong and rejected any criticism about the negative influence of the rate hikes on the S&P 500?
According to him, the Fed has been normalizing its monetary policy for a long time, but the stock indexes are still rising.
Yes, the U.S. industrial production in October hasn’t met the forecasts of Bloomberg experts; but it has been expanding during a few consecutive months despite the dollar revaluing. The market is driven by the concerns about a soon reversal of the USD trend that has allegedly been growing for too long. The situation is fueled by the bullish forecast for the EUR/USD. Morgan Stanley (NYSE:MS) believes that the greenback rally is to end soon. It should be sold because of widening credit spreads, lower equity prices and Treasury yield. The reasons for such moves of assets are rather in higher deflation pressure, resulted from a drop in oil prices. Goldman Sachs (NYSE:GS) and Credit Agricole (PA:CAGR) also agree that the USD is close to its extreme levels.
However, the market ignores the slower growth of the euro-area GDP, including the unexploited potential of many economies in the currency block. It neither pays attention to the risks of the ECB new quantitative easing program in 2019 or to the Italy’s political crisis
Potential Of Euro-Area GDP Rates
Source: Bloomberg
As the Eurozone economy is expanding at the slowest pace since the QE was just being discussed, why the ECB shouldn’t follow the old path? Now, it is not beneficial to extend the program due to the leadership change and the dove’s willingness to please the pro-German lobby in the Governing Council. That will be another matter after Mario Draghi and Peter Praet resign. I doubt in the EUR/USD sustained uptrend, and there are a few reasons. Italy’s possible credit rating downgrading, the EU sanctions and growing risks that the euroskeptics will go ahead in the European Parliamentary elections in spring. So, it is still relevant to sell the euro on its rise.