Looking at how the US stock market in May first collapsed and then began to recover under the influence of Donald Trump’s tweets, you make sure that it becomes a toy in the hands of the US President. A statement on the introduction of duties on all Chinese imports sent the S&P 500 to a knockdown, but the stock index managed to recover and mark a three-day rally after it was announced that the deal with China would be concluded earlier than people assumed. The most interesting thing is that the US dollar fell due to the escalation of the trade conflict, and then grew due to the optimism of Donald Trump. It behaves as a risky asset, although it is usually referred to as a safe haven currency. What is it?
While the rates on 10-year US Treasury bonds are 2.4%, and on German and Japanese analogs are negative in conditions of high-risk appetite and historically low volatility, the carry trade strategy with the participation of EUR/USD and USD/JPY begins to flourish. Players on the difference borrow money in countries with low borrowing costs and invest them in profitable assets. Thanks to the Fed’s desire to keep the Federal funds rate at 2.5% for an infinitely long time and the belief in the imminent end of the trade war between Washington and Beijing, carry-traders felt like a fish in the water, but Donald Trump’s tweets turned everything upside down. Funding currencies represented by the euro and the yen began to be in high demand, and stock indices pulled the USD index down.
Dynamics of Dow Jones and US Dollars
The “bears” on USD/JPY felt more confident than “bulls” on EUR/USD, due to the aggravation of political problems in the Old World. Not only that the chances of the resignation of Theresa May from the post of British Prime Minister increased significantly, which drowned the pound, but also the elections to the European Parliament decided to remind themselves of the Italian populists. Vice Prime Minister Salvini said he would lift the EU’s tough requirements of a 3% budget deficit from GDP, and let Brussels do what it wants. The exacerbation of political risks is a negative factor for the euro, and as the elections approach, they will increase.
From the point of view, the key event for EUR/USD in the week to May 24 will be the release of data on business activity in Germany and the eurozone in May. Participating in Markit’s survey, procurement managers already knew about the escalation of the US-Chinese trade conflict so the statistics can be disappointing, which will create the preconditions for the continuation of the southern hike of the main currency pair. To support the euro, the correction in world stock markets is needed. In this situation, the demand for funding currencies will increase.
Technically, a breakthrough of support at 1.1135 on the daily EUR/USD chart will increase the risks of target implementation by 161.8% using the AB = CD pattern. It corresponds to a mark of 1.1. In order to maintain hope for the activation of the “Wolfe Waves” reversal pattern and the fulfillment of its targets, the “bulls” should return quotes above 1.127.
The material has been provided by InstaForex Company – www.instaforex.com