EUR/USD reacts to U.S. financial independence instead of Fed’s monetary policy
October 18, 2023 9:23 pm
The surge of EUR/USD in response to strong retail sales and industrial production data appears paradoxical. Especially considering that against this backdrop, the yield on 10-year U.S. Treasury bonds has returned to its highest levels since 2007. According to MUFG, the intriguing deviation of the dollar from previously accepted norms may trigger further sales. Investors won’t bother to investigate the reasons behind it and will sell the “greenback” on impulse.
The rally in U.S. Treasury bond yields faithfully served the “bears” on EUR/USD for several months. However, it gradually began to worry the Federal Reserve. Why? It’s clear that tightening financial conditions cool down the economy and could trigger a recession. But the main reason lies elsewhere. The United States sits on a mountain of $35 trillion in debt, and rising bond yields increase the cost of servicing that debt. Investors get the feeling of financial trouble, which is bad for the U.S. and its currency.
Dynamics of American debts
In other words, there is a limit to the rally in U.S. Treasury bond yields. When this limit is reached, the dollar stops rising and starts falling because investors’ focus shifts from the Fed’s monetary policy to the financial stability of the United States.
This, undoubtedly, makes sense. However, there’s also the theory that the U.S. dollar follows oil. In turn, it also reacts to the development of armed conflicts in the Middle East. Visits by high-ranking officials from the U.S., Germany, and France to Israel are perceived by traders as signs of de-escalation of the conflict, leading to a drop in Brent prices and a rise in EURUSD quotes. Conversely, an explosion in a hospital in Gaza and Iran’s warlike rhetoric intensify tensions. Black gold rises, and the euro falls against the U.S. dollar. The market is fixated on the Middle East, unsure how the situation will unfold.
Thus, the main reasons for the retreat of EUR/USD are: Firstly, impulse trading after the dollar failed to capitalize on strong retail sales and industrial production data. Secondly, a shift in the U.S. Treasury bond market, with investors redirecting their focus from the Fed’s monetary policy to the financial independence of the United States. Lastly, the development of the armed conflict in Israel.
The first two factors are unequivocally negative for the U.S. dollar. In the third case, it’s about a dynamic variable. Its dynamics could provoke medium-term consolidation of the major currency pair in the range of 1.05-1.07.
Technically, on the daily chart of EUR/USD, despite the retreat, the “bulls” are not giving up on playing out the reversal pattern 1-2-3. For the correction to develop, the quotes of the pair need to rise above 1.059. If this happens, we will buy the euro against the U.S. dollar. However, as long as trading occurs below this level, we stick to the selling strategy.
The material has been provided by InstaForex Company – www.instaforex.com
The surge of EUR/USD in response to strong retail sales and industrial production data appears paradoxical. Especially considering that against this backdrop, the yield on 10-year U.S. Treasury bonds has returned to its highest levels since 2007. According to MUFG, the intriguing deviation of the dollar from previously accepted norms may trigger further sales. Investors won’t bother to investigate the reasons behind it and will sell the “greenback” on impulse.
The rally in U.S. Treasury bond yields faithfully served the “bears” on EUR/USD for several months. However, it gradually began to worry the Federal Reserve. Why? It’s clear that tightening financial conditions cool down the economy and could trigger a recession. But the main reason lies elsewhere. The United States sits on a mountain of $35 trillion in debt, and rising bond yields increase the cost of servicing that debt. Investors get the feeling of financial trouble, which is bad for the U.S. and its currency.
Dynamics of American debts
In other words, there is a limit to the rally in U.S. Treasury bond yields. When this limit is reached, the dollar stops rising and starts falling because investors’ focus shifts from the Fed’s monetary policy to the financial stability of the United States.
This, undoubtedly, makes sense. However, there’s also the theory that the U.S. dollar follows oil. In turn, it also reacts to the development of armed conflicts in the Middle East. Visits by high-ranking officials from the U.S., Germany, and France to Israel are perceived by traders as signs of de-escalation of the conflict, leading to a drop in Brent prices and a rise in EURUSD quotes. Conversely, an explosion in a hospital in Gaza and Iran’s warlike rhetoric intensify tensions. Black gold rises, and the euro falls against the U.S. dollar. The market is fixated on the Middle East, unsure how the situation will unfold.
Thus, the main reasons for the retreat of EUR/USD are: Firstly, impulse trading after the dollar failed to capitalize on strong retail sales and industrial production data. Secondly, a shift in the U.S. Treasury bond market, with investors redirecting their focus from the Fed’s monetary policy to the financial independence of the United States. Lastly, the development of the armed conflict in Israel.
The first two factors are unequivocally negative for the U.S. dollar. In the third case, it’s about a dynamic variable. Its dynamics could provoke medium-term consolidation of the major currency pair in the range of 1.05-1.07.
Technically, on the daily chart of EUR/USD, despite the retreat, the “bulls” are not giving up on playing out the reversal pattern 1-2-3. For the correction to develop, the quotes of the pair need to rise above 1.059. If this happens, we will buy the euro against the U.S. dollar. However, as long as trading occurs below this level, we stick to the selling strategy.
The material has been provided by InstaForex Company – www.instaforex.com
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