Does it make sense to buy EUR/USD amid the U.S. strong statistics?
The EUR/USD pair has hardly responded to the attempts of the U.S. and China to calm the financial market down. As China is not that willing to announce its concessions, global stock indexes are sliding down. However, the news about 90-day term and the tough penalties for the local companies, violating the intellectual property rights is gradually being released. China expresses confidence that the agreement will be reached. Donald Trump touts “very strong signals” from Beijing and explains the lack of news from China’s officials with the long trip home from Buenos Aires
I still believe that the countries’ willingness to negotiate is the conflict easing that deprives the dollar of its major benefit. Another matter is that what the scale of the conflict is. According to Fisher Investments, the amount of already existing tariffs, along with those Washington is threatening, is just 0.28% of global GDP. However, Markit suggests trade battles to be one of the reasons for a slowdown in the euro-area economy growth. It looks like fear has many eyes. Once European companies realize it, the euro-area PMI will start going up, which a bullish factor for the euro.
Dynamics of the euro-area PMI and GDP
Source: Bloomberg
In my opinion, the lack of EUR/USD sensitivity to Beijing and Washington’s attempts to calm down the shaken market results from the fact that there are more important economic events. Investors are preparing for the report on the US employment in November, which, in fact, could be better than it is expected. Workers' return after the two-month delay, resulted from hurricanes, and active recruiting of outside employees by retail companies, holding sales, can add to non-farm payrolls more than 200,000, expected by Bloomberg experts. Investors wonder whether they should sell the dollar as the U.S. unemployment is close to its 49-year low and the average wages rate is up to 3.1%.
On the one hand, the strong statistics discourages from this. On the other hand, according to Reuters consensus forecast, EUR/USD will be up at 1.2 in 12 months due to a slower growth of the U.S. GDP. Bulls have a perfect opportunity to buy when everyone else is selling. Why not get use of it? Slowing down of the U.S. economy expansion is a real problem for the greenback. During the first three quarters, the yield curve was flattening due to the leading growth of 2-year bonds over 10-year ones, but in the fourth quarter, the latter are going down. That is, the market used to suggest that the Fed was hiking the interest rate too aggressively, but believed in the U.S. GDP strength. Now, it doesn’t believe. It is waiting for the central bank’s response.
Dynamics of U.S. Treasury yields
Source: Wall Street Journal
The Federal Reserve may of course ignore the signals of the yield curve and go on hiking the rate; however, it always resulted in recession in the past.
In my opinion, the report on the U.S. employment for November is very important. Weak statistic may result in EUR/USD substantial growth, increasing the risks of market turmoil. Investors see it, bases on the fact that the pair is still in the consolidation range of 1.126-1.142.