EUR/USD Dollar Changes Gear
LiteForex | Aug 01, 2018 09:32AM ET
The growth gap between the U.S. and the Euro-area economies in the second quarter is the widest since 2014.
If the eurozone economy continues to gain at the current low pace, the ECB won’t remove its monetary stimulus soon. The Euro-area GDP growth slowed down to 0.3% Q-o-Q in the second quarter, showing the worst results since 2016. Compared to April-June period, European economy expanded by 1.4%, and the growth gap with the U.S. economy (+4.1%) turned out to be the widest since 2014. Different paces of GDP growth, expand the spread between the interest rates, support the capital outflow from the Euro-area to the USA and encourage the EUR/USD bears. The matter is that their past success doesn’t guarantee the same gains in future.
Economic growth gap
Source: Wall Street Journal
According to JP Morgan, most of the positive is already priced in dollar pairs, while a gradual improvement of European economy will drive EUR/USD quotes up the levels of 1.2 and 1.25 in late 2018 and mid-2019. Toronto-Dominion Bank believes that global economy’s recovery will return to the market the idea of monetary normalization by the Fed rival central banks, creating a strong barrier to the USD index further rise. Wells Fargo forecasts that a slowdown in the U.S. GDP growth will make the Fed increase the federal funds rate at a lower pace, which will hit dollar. Morgan Stanley refers to the excessively increased dollar net longs and that Donald Trump is annoyed with the stronger dollar.
EUR/USD bulls were discouraged by an increase in the U.S. personal consumption expenditures rate to 2.2% Y-o-Y in June. The U.S. core PCE is 1.9% up, almost hit the Fed’s target.
Dynamics of U.S. inflation
Source: Bloomberg.
Taking into account the record GDP gains and the U.S. unemployment rate, being near the lowest levels for the past few decade, we can expect the U.S. inflation to further accelerate. The matter is how long the Fed is going to put up with it. The derivative market suggests 68% probability of four federal funds rate hikes in 2018. That is, this factor has almost entirely been included in the quotes of dollar pairs. But will the U.S. economy manage to retain the same growth pace as it featured in the second quarter?
As for euro, there are also some doubts that the eurozone GDP can increase in the second half-year. The ECB expected it would rise during April-June period, explaining the weak start by seasonal factors: bad weather, a flu epidemic, strikes of German workers. Now, the ECB explains the slow economy’s expansion with trade battles, strong euro, removing the monetary stimulus and political crisis in Italy. The last two factors continue working in July-September. In particular, Rome will be adopting the draft budget, which may not be liked by Investors.
Get The News You Want
In the short-term, the market attention is focused on the Fed’s meeting and the report on the U.S. employment in June. To continue the euro rally, EUR/USD bulls need do storm the resistance at 1.1745. The nearest important support is around 1.1595
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.