Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

EUR/USD Euro Likes Paradoxes

Published 07/31/2018, 08:35 AM
Updated 11/29/2020, 05:10 AM

EUR/USD bulls went ahead as the ECB willingness to retain the interest rate doesn’t match the Euro-area economy’s expansion.

EUR/USD bulls managed to draw the euro price up above figure 17 base due to the drop in Treasury yield, concerns about Fed’s neutral rhetoric and the strong statistics on Germany inflation. There are rumors in the market that the Fed needs to normalize monetary policy more aggressively than the rival central banks to continue the USD index rally. But it’s rather hard, as Donald Trump is annoyed by increasing the federal funds rate, and the ECB is clearly hiding something.

Investors are still dwelling upon the information, suggested by the last meeting of the Governing Council. Yes, Mario Draghi has explicitly stated that the interest rate is likely to remain the same through September, 2019; however, he was quite optimistic about the prospects of the eurozone economy and noted easing of the trade war tensions, after the EU-USA truce. Euro bulls has discovered an obvious contradiction, and so, they have been encouraged to expect the EUR/USD price to continue rising. For example, CIBC expects euro dollar exchange rate to reach 1.18 and 1.28 in late 2018 and early 2019. Bloomberg median forecast for the same periods suggests 1.18 and 1.26.


EUR to USD forecasts
EUR/USD Performance Chart

Source: Bloomberg.


At present, the market expects an increase in the deposit rate in September, and the ECB refinancing rate to be hiked in December, 2019. If the positive macroeconomic statistics will suggest earlier timeliness, euro supporters will be encouraged. CPI was 2% up in July; core inflation rate was 1.4% up. In addition, Commerzbank expects a further increase due to a higher pace of average wages growth.

Moreover, if the Euro-area lacks the internal demand, it can be stimulated by means of expansionary fiscal policy. The USA fiscal stimulus has started the tendency, so, why shouldn’t other countries follow its example? According to Morgan Stanley, in 2018-2019, the budget deficit in the USA, Euro-area, Japan and Great Britain will expand from 2.5% up to 2.8% and 3%. The ECB believes the fiscal policy to be moderate expansionary, and the abandoning of the fiscal consolidation principles can accelerate the economic expansion.


Dynamics of structural budget balance


Change in Structural Budget Balance
Source: Bloomberg


I, personally, think that euro success is not that substantial. Another matter is that dollar loses its earlier advantages and needs a new driver. Investors’ doubts that the USA economy will further expand at the same pace (+4.1% Q-o-Q) as in the second quarter are supported by the growing risks of slower monetary normalization by the Fed and the drop in Treasury yield. The latter may have resulted from the BoJ unwillingness to quit its ultra-loose monetary policy, which lured the Japanese investors back to the U.S. securities.

The market will carefully watch the reports on the Euro-area GDP and inflation. A pleasant surprise will encourage EUR/USD bulls to storm the resistance at 1.1745.

Latest comments

President Trump is hard to figure out: He brags about a strong $ and a strong economy, yet seems to want a weak $ to boost exports.  I expect the US Central Bank (Fed) to try to slow (or destroy - as suggested by Brandon Smith) the US economy.  I also see all of Europe in bad shape with huge debt and lack of economic growth to cover the debt.  1.2800 may be a bit of a stretch.  My current target for sometime in late 2019 (before US 2020 elections) is 1.1910.  Of course, the above is just a wild guess deduced from my readings in the alternative media. ;-)  We are living in interesting times and the world of the 1990s is gone.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.