EUR/USD: do not trust the growth of the European currency, while the pair is below 1.1650
On Tuesday, the European currency is in a great mood. The euro dominates not only in the pair with the dollar, but also in cross-pairs, especially with the pound. And although the foreign exchange market is forced to settle for a half-empty economic calendar for the day, the single currency has found a reason for corrective growth.
We are talking about Germany’s foreign trade performance, which was surprisingly better than expected. The positive report on the German trade balance somewhat reduced nervousness about the risks of a trade war. This figure was better than expected and reached almost 22 billion euros. Experts predicted a more modest result, at the level of 21 billion euros. The current balance of payments also did not disappoint traders. The indicator came out at 26 billion euros against the forecast of 20 billion euros. Exports were at the zero level, although analysts predicted a decline in the negative area. But the indicator of imports increased to 1.2% with a growth forecast of only 0.3%. Foreign trade surplus for the first half of the year was at the level of 121.5 billion euros, which corresponds to a six-month level last year.
In other words, German indicators show positive changes, but it is impossible to call it a “sensational breakthrough”. Therefore, the upward dynamics of the EUR/USD looks rather unreliable, especially since disappointing data from Germany was published – the volume of industrial production, contrary to optimistic forecasts, remained in the negative area, falling to -0.9% on a monthly basis – this is the worst result since April. In annual terms, there was also a decline of up to 2.5%.
But traders needed an excuse for the upward correction of the EUR/USD pair, so the negative factors were simply ignored. Moreover, the dollar index also slowed down the growth, dropping from the annual high back to the area of the 94th figure. The Chinese yuan played a role here. The USD/CNY pair has suspended its rampant growth, which almost recoillessly continued since April. Almost at 6.9, the yuan slowed and gradually began to roll back – now the pair is trading at 6,821.
According to the American press, on Tuesday, the People’s Bank of China held a meeting with representatives of the 15 largest banks in the country. The central bank assured the bankers that the regulator has enough leverage and forces to stabilize the market, as well as to maintain the flexibility of the national currency. In addition, it became known that China’s foreign exchange reserves in July unexpectedly increased by 5.82 billion dollars (the total amount corresponds to 3,118 trillion dollars). Experts did not expect such a result – moreover, according to general forecasts, the foreign exchange reserves of China should, on the contrary, decrease by more than $12 billion.
These facts offset the demand for the greenback, after which the dynamics of dollar pairs changed slightly. It is not only the euro that is being adjusted-the Japanese currency has also shown character for the day, as well as the Swiss franc. Even the pound, which is under the powerful pressure of the negative fundamental background, has moved away from the local lows.
Of course, we can not talk about any substantial changes here – the dollar remains a favorite in almost all currency pairs, at least in the near future. Although a half-empty economic calendar allows traders to get distracted from the “fluidity” and think over bigger issues. Among them is the inversion of the yield curve. Recently, this issue is increasingly raised among experts and among the Fed members. Concerns about the narrowing of the spread between short-term and long-term US government bonds are quite reasonable, because the yield curve was inverted on the eve of each of the last seven American recessions.
And given the fact that over the past month the yield curve has become more flat, this issue has regained its relevance. At its last meeting, the Fed ignored such trends, so the market did not focus on this either. Although some members of the Fed (mainly from the “dovish” camp), as well as the former chairman of the Federal Reserve, Ben Bernanke, sounded alarming signals. In particular, Bernanke acknowledged that in modern conditions, the inversion of the yield curve is “not the only one, but one of the harbingers of the economic downturn.” Here it is worth recalling that more than a decade ago, he ignored the approach of the curve to the inversion, but in the following year, 2007, the US economy entered a recessionary zone.
However, the market so far is calm about such signals, especially against the backdrop of a strong enough US GDP growth in the second quarter. Therefore, hypothetical threats are remembered only sporadically or during periods of news lull. On Tuesday, this topic again “surfaced” in the press, exerting additional (albeit insignificant) pressure on the dollar.
But such fundamental factors have no long-term impact. Therefore, the long positions on the EUR/USD pair should be treated with extreme caution, especially as long as the price did not overcome the strong resistance level of 1.1650 (the lower limit of the Kumo cloud coinciding with the average line of the Bollinger Bands indicator on the daily chart). As long as the pair has not fixed above this level, there is a serious risk of a price rollback to the levels of the local low, that is, to the middle of the 15th figure. The day’s fundamental factors are not able to provide the bulls of the pair with impulse and full-scale growth, so long positions on the EUR/USD pair look unreliable.