Higher risks of messy Brexit discourages EUR/USD bulls
They now face what they were afraid of. Organizing the attack on the resistances at $1.1425 and $1.1445, the euro bulls were contemplating stepping back if there is bad news from the British Parliament. Theresa May is postponing the vote on her Brexit deal, which resulted in mass sales of GBP. The Prime Minister has admitted that the document is likely to be rejected by policy-makers, and so the government was stepping up to prepare no-deal exit from the European Council. The sterling crashed over the edge at about $1.27 and was followed by the single European currency.
Dynamics of GBP/USD and EUR/USD
Source: Trading Economics
Political risks and the weakness of the euro-area economy prevent the EUR/USD bulls from reversing the trend. Sentix Investor Sentiment Index has been in the red zone for the first time over four years. The research company notes that the trade tensions, Italy’s budget crisis, turmoil in France and Brexit increase the uncertainty. Sentix announced that there were “rays of hope to be reported” in the euro-area and suggested that the ECB must protect the economy and re-establish the safety net for the economy (differently put, to extend QE). Especially since the recent fall in Oil prices can subsequently press the inflation rate down.
In fact, the situation now suggests that the European Central Bank should have resorted to dovish rhetoric a long time ago. If the Governing Council doesn’t do it at the December meeting and continues insisting that the Euro-area GDP is about to recover, it may send a strong bullish signal for the EUR/USD. The derivative market doesn’t believe that the ECB will raise the deposit rate or the main refinancing rate will be increased in 2019. The divergence between the derivative market and the ECB views will push the German bond yield up, narrow the spread with the U.S. peers and support the euro.
Dynamics of EUR/USD and U.S.-Germany 10-year yield spread
Source: Bloomberg.
Although investors are lured back to the dollar as a safe-haven asset due to Brexit, in terms of monetary policy, hardly anything changed. CME derivatives cut the odds on one Fed rate hike in 2019 down to 49% and suggest already 10% probability of its lowering. One of the devoted dollar supporters, Goldman Sachs (NYSE:GS) is not so confident in the monetary policy tightening in March and warns that the dollar may pressed if the FOMC projections are worse in December. Nevertheless, the bank still believes that the U.S. dollar will survive the storm and continues strengthening.
So, the USD is about to be sold off after the last Fed meeting in the current year as the central bank loses confidence in three interest rate hikes in 2019 amid a slowdown in the economy expansion. Investors are not willing to get rid of the greenback now, waiting for the Fed statement. In addition, the EUR/USD bulls may be encouraged to go ahead if the U.S. inflation slows down in November, the ECB is still optimistic and the European PMI in December is strong. As long as the pair is held above 1.1265, the chances of new attacks are still high.