What is happening on Forex causes a feeling of deja vu more and more. The beginning of this year was marked by a sharp change in the tone of the Fed statements, which increased the risk of breaking the uptrend in USD. However, the “dovish” rhetoric of other leading central banks sent the greenback competitors to the knockdown already in February.
The slowdown in the growth of the European economy includes the reduction in external demand as a reason, knocked on the ground under the feet of EUR/USD bulls in March. Only in April had they began to recover as it turned out that in May, it was still too early to put an end to the trade wars of Washington and Beijing.
Trade contradictions between the two largest economies in the world are still far from resolution and now, the main question is who will surrender first. Donald Trump is confident that the United States will cope with the PRC since it imports about five times more Chinese goods than the Middle Kingdom from America. While some analysts agree with this statement, others believe that it also simplifies the real state of affairs.
According to an economist, Gary Shilling, the US president Donald Trump will not only win the seemingly endless trade war with China but will also improve the position of the United States in the long term.
“Advantage and absolute power, as a rule, are in the hands of the buyer, not the seller. In this case, the buyer is the United States, and the Celestial is the seller”, he said.
It is assumed that for China, it will be difficult to find buyers for its consumer products if it loses the US market.
Meanwhile, the greenback seems to care about how the trade relations between Washington and Beijing are developing. The US currency strengthened for the fourth month in a row. Despite the fact that the chances of interest rate cuts by the Fed are growing, and the yield curve of treasuries overturned, the demand for USD remains high, signaling an increased risk of a recession in the US.
Of course, the Fed is well aware that revaluation is harmful for exports and inflation but there are always two currencies in any pair. The likelihood that the ECB will soon replace the “dovish” rhetoric with the “hawkish” one is extremely low. According to the latest survey of experts from Bloomberg, the regulator will increase the rate of deposits only by April 2020. At the same time, the May release on business activity in China’s manufacturing sector indicates that the world’s largest economy continues to slow down. This does not add optimism to the EUR/USD bulls.
After the third breakdown of the level of 1.12 over the year, the conditions for a further weakening of the euro against the US dollar have developed. However, the downward movement stopped near the 1.11 mark.
Not even the newly aggravated trade conflict between Washington and Beijing or the increased risks of implementing the “tough” Brexit scenario or the elections to the European Parliament became a catalyst for a stronger decline in the single European currency.
Since April, the EUR/USD pair has been trading in the range of 1.1120 – 1.1260. The pair’s exit beyond its borders will apparently depend on whether the United States and the Middle Kingdom can put an end to the trade war.
It is possible that investors may proceed to a larger sale on the stock market in the event of a systematic escalation, which will lead to further growth of the greenback and weakening of the euro.
“The EUR/USD pair is still holding above the level of 1.11, but the threat of updating the annual lows around 1.10 is becoming more and more real,” said Westpac currency strategists.
According to them, the reasons for the fall in the euro could be differences between the government of Italy and the EU, as well as weak data on inflation in the eurozone, which will be released next week.
In addition, experts noted that investors again began to pay attention to the spread of two- and five-year bonds of the United States and Germany.
“The returning importance of the spread to currency investors can only mean one thing – the risk of further reducing EUR/USD,” believe at Westpac.