EUR/USD is going to storm the key support at 1.13
Is there any point in getting rid of the dollar, if the major USD bears are not going to sell it? According to Societe Generale (PA:SOGN), as long as the Fed is hiking the rate, the US labour market is improving and the trade wars are exciting investors’ minds, it makes no sense to sell the US dollar. Credit Agricole claims that it will be relevant to buy EUR/USD only in late 2019, when there will be more talks in the market about a pause in the normalizing the monetary policy by the Fed and its start in the euro-area. The greenback will also be pressed down by the political arguments between Republicans and Democrats about the tax reform.
BofA Merrill Lynch states that the dollar is going to be getting weaker in 2019 due the gradual exhausting of the former drivers; however, on the short- and the middle-term scope, the major currency pair will be pressed by the Italy’s political crisis and Brexit. In fact, the 40-day correlation between the euro and the pound has hit the value of 0.8. Uncertainty about Brexit puts a pressure not only on the UK, but on the entire euro area as well; which is expressed in the lockstep dynamics of the GBP/USD and EUR/USD. With this respect, the discussion about the deal with Brussels in Theresa May’s government can become an important driver for the main currency pair during the week, ending November 16.
Dynamics of correlation between EUR and GBP
Source: Bloomberg
The situation in Italy is also very dangerous. Rome is not going to express any response, the time is passing, and there might be a thunder on November 13. The correction of the Italy/Germany bond yield gap means that investors believe there will be a compromise, achieved at the last second. But what if the parties fail to reach a consensus? EURUSDcan well hit its 18-month lows.
Dynamics of Italy-Germany bond yield spread
Source: Bloomberg
Another risk factor for the euro bulls may become the report on the US inflation rate for October. According to Morgan Stanley (NYSE:MS), both consumer prices and the core inflation rate may surge because of import tariffs, the US tight labour market, higher costs of used vehicles and an increase in the Medicare reimbursement. Even since the Fed is likely to treat it as a temporary process, the nervous market can well increase the probability of the Fed’s aggressive monetary restrictions, encouraging investors to buy the US dollar.
Unlike the US dollar bears, suggesting their clients shouldn’t give up on the greenback, the bulls recommend boosting the USD longs. BNP Paribas advises to sell the euro and the Asian currencies against the US dollar due to the increase in the fed funds rate, the US trade war with China, and the European political risks. The USD spot rate is currently 37% lower than its all-time high, recorded 33 years ago. There is still space to grow. The breakout of the support at 1.13 might be the further evidence of this idea.