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EUR/USD: high probability of further strengthening of the dollar

05/16/2018
at 9:04 AM

Current situation

The growth of yield of US government bonds provoked a sharp strengthening of the US dollar. So, on Tuesday amid a rapid increase in yield on 10-year US Treasury bonds to 3.070%, the dollar strengthened throughout the currency market.

Futures on the dollar index DXY, reflecting its value against the basket of 6 other major currencies, rose on Tuesday to 93.35, to close at 93.14.

Many participants in the financial market believe that the growth in yields of 10-year US government bonds may continue, which will further strengthen the dollar. And the broken resistance level of 3,050% is now supporting for further growth of yield to the level of 3,200%, the maximum value for the last 7 years.

10y

The US dollar on Tuesday also rose against the background of positive data on retail sales. The Ministry of Trade reported an April increase in retail sales in the US by 0.3% compared to the previous month. Data on retail sales are of great importance, since consumer spending accounts for more than two thirds of US GDP.

At the same time, the growth rates of the Eurozone economy are falling compared to previous quarters. Thus, the Eurozone GDP growth in the first quarter of 2018 was + 2.5% (in the previous quarters growth was + 2.8%, + 2.7%). This was reported on Tuesday by Eurostat.

 dxy

Market expectations

The EUR / USD fell more than 100 points in two days, closing on Tuesday at 1.1838. On Wednesday, there is a downward correction in the dollar after its rally the day before. Nevertheless, the dollar is likely to strengthen further. The increase in the yield of US government bonds suggests the possibility of a faster rate of tightening monetary policy in the US.

According to the quotations of futures on the Fed's rates, investors estimate the probability of three rate hikes by the end of the year at 52% against 50% on Monday and 39% a month ago.

Below the key resistance level 1.1970 (EMA200 on the daily EUR / USD chart) it is necessary to consider only short positions.

Of the news for today, which is worth paying attention to, publication at 09:00 (GMT) of consumer price indices (CPI) in the Eurozone, which are a key indicator for assessing inflation.

It is expected that in April, consumer prices rose by 1.2% (in annual terms), the base CPI rose by 0.7%. Evidence suggests that inflation in the Eurozone is still well below the ECB's target level, and this is a negative factor for the euro.

At 12:00 (GMT), the ECB head Mario Draghi's speech is scheduled. If it touches on the topic of monetary policy in the Eurozone, then volatility in the euro bid will intensify. Any hints from him on the possibility of starting the curtailment of the QE stimulus program will cause the euro to rise, including in the EUR / USD.

Euro / dollar volatility may also rise at 12:30, 13:15 14:30 (GMT), when representatives of the ECB, the Fed give a speech and macro statistics on the US come out.

eud