EUR/USD Euro Is Going Down
LiteForex | Oct 23, 2018 07:01AM ET
EUR/USD bears may drive the rate lower due to the successful storm of the support at 1.143-1.145
As it had been expected, an increase in emerging markets’ currencies and the Italian assets provided only temporary support to EUR/USD bulls, allowing to open shorts amid the pair rise. Yes, Moody’s agency hasn’t downgraded Italy’s rating, announcing a stable outlook, but the worst is to come. Rome ignores Brussels statements that the budget plan doesn’t correspond to the EU rules, insisting that the higher pace of economic expansion will reduce the debts share of GDP. The project is likely to be corrected; and, unless there is any progress, there will be some punitive measure against Italy. Increased political risks in the euro-area are the strongest driver, supporting the euro sellers; especially since Donald Trump is trying to reduce the political influence on the US economy.
The U.S. president tried to appease the voters, stating that the Congress, following the mid-term elections, will discuss the issue of 10% tax reduction for the middle class. Currently, Democrats are likely to get the majority in the House. They bet on the U.S. president’s low rating and the fact that the majority haven’t benefited from the fiscal stimulus. Mostly, well off American got the advantage. Therefore, Donald Trump is trying to address multiple problems by his new promises. In addition, the U.S. president still has the advantage of the best GDP growth results during two consecutive quarters since 2014.
Washington has resumed trade talks with Brussels after the truce, called in July. The U.S. approach is based on the work “toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.” It is the third attempt of the sides to reach an agreement since 2007; I personally doubt that they will easily achieve the deal.
Dynamics of the U.S. foreign trade
Source: Wall Street Journal
Therefore, the key drivers, moving the EUR/USD rates on the short-term scope, are the report on the ECB meeting, publication of the US GDP report for the third quarter and the changes in Italy’s bond yield. The Italy-Germany bond yield gap has been of 341 bps, on October 19; the widest over the past 5 years. According to Credit Suisse, if the spread is as wide as 400 bps, Italy’s banking system will be charged by strong pressure. It has already €260 billion of credits to pay off, which is the biggest debt in the EU.
I don’t think that Mario Draghi and his team will try to save the falling euro. On the contrary, the euro devaluing provides favorable environment to boost the core inflation rate; and so, lets the ECB complete its major task. The EUR/USD has hit the support at 1.143-1.145 twice for past few days; if bears break it through, they may drive the euro deeper, towards 1.13.
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