The Financial Times gave 17 reasons for the weakening of the US dollar, and as if to spite the tabloid, the US currency is beginning to strengthen. It must be understood that the press finds out about all of the latest events, and if you want to survive in the market, you need to get into the head of big players and understand exactly what fundamental factors they rely on the basis of their short-term strategies. Currently, the focus of investors is the parliamentary elections in Italy, a disappointing start to the European economy and the slow normalization of the ECB's monetary policy.
As a rule, growth of populism effectively recoups in conditions of the weakened national economy. A year ago, Marine Le Pen with her National Front was building a pre-election program on the problems of France. Theoretically, they could be solved by the output of their eurozone and a return to the franc, wherein a competitive devaluation of which would facilitate the growth of exports. By March 2018, everything had changed. Looking at the rapid development of neighboring states, even Italy, which is not doing well in recent years, is gradually rising from its knees. As a result, the Eurosceptics "Five Stars" party can celebrate the Victory, reject the idea of a referendum on membership in the currency bloc, according to the latest opinion polls. The political risks in the Old World are muffled, but they are there. First of all, problems can arise with debt restructuring. The value of the latter is about 130% of GDP, and this is the largest indicator in the euro area after Greece. A capital flight will undermine the authority of the euro.
If by the end of 2017, the GDP of the countries of the currency block significantly exceeded the consensus forecast of the Bloomberg experts (+ 2.7% vs. + 1.7%), then there is no reason to rejoice in a vigorous start this year. Weak statistics on European PMI and consumer confidence, as well as on German business confidence, lowered the index of economic surprises to the lowest level since 2016. At the same time, the Fed officials are not tired of talking about the strength of the US economy, unlike the eurozone that relies in the indicators.
The dynamics of the index of economic surprises and the yield of US Treasury bonds.
Source: Citigroup.
The inability of EUR / USD to gain a foothold above the psychologically important level of 1.25 and the neutral rhetoric of a "hawkish" Governing Council make investors think that the euro rally was too quick. The ECB is unlikely to curtail the European QE ahead of schedule, and if inflation continues to look weak, then it does prolong the program's timing of asset purchases. Given the focus of the Fed on three to four increases in the federal funds rate in 2018, the position of "bulls" for the main currency pair is beginning to look shaky.
Parliamentary elections in Italy, a weak start to the euro-zone economy and the resuscitation of the divergence in the monetary policy of the ECB and the Fed are strong arguments in favor of profit-taking on the euro by hedge funds and asset managers.
Technically, the fall in quotes of the EUR / USD pair below the level of 1.22 will activate the "Expanding Wedge" pattern and open the southward course towards the range of 1.2 - 1.205.
EUR / USD, daily chart
