The supporters of the single European currency hope that the signing of a trade deal between Washington and Beijing will help to restore the eurozone economy, however, data on the business activity of the currency block for December showed that it is too early to talk about it. On the other hand, the fans of the dollar are dreaming of continuous economic expansion and new highs of the S&P 500 index. But unfortunately, no matter how strong the stock market, the inversion of the yield curve of the treasuries still leads to a recession, which could be seen, for example, twelve years ago.
Meanwhile, the PMI in the manufacturing sector in Germany amounted to 43.4 points in December against 44.1 points recorded in November. This was the first reduction in the indicator over the past three months. Its European counterpart is declining for the eleventh consecutive month. At the same time, the modest value of the composite PMI index of 50.6 indicates that the economy of the currency block in the fourth quarter will expand only by 0.1% and it is clear that it is not in a hurry to recover. Thus, it is still difficult to count on the V-shaped GDP movement in the eurozone given that many US duties on Chinese imports remain in force.
It is obvious that the trade war between the US and China caused the greatest damage to open economies, where the share of exports in GDP is significant. A clear example of this is Germany.
The disruption of the supply chain associated with the protectionist policies of Donald Trump has led to a slowdown in international trade. The leading dynamics of this indicator over the American purchasing managers index, as a rule, leads to EUR/USD rally , and vice versa. Due to the fact that the dollar usually strengthens if the US economy outperforms its global counterpart. The same can be said of international trade.
The fate of the dollar will also depend on which indicator grows faster - the American PMI in the manufacturing sector or global trade.
As a result, the USD index slipped to five-month lows amid de-escalation of the trade conflict between the US and China, as well as clarification of the situation around Brexit.
Positions of the dollar have not looked so uncertain since the beginning of 2018, and thus, more and more strategists are waiting for a further weakening of the American currency, but not everyone is sure of this.
In particular, Goldman Sachs experts advise the "bears" on the dollar to "hold their horses."
"For the further significant decline in the dollar, the euro should strengthen significantly, and this seems unlikely so far. The euro faces obstacles due to the risk of introducing new US tariffs on European goods. Despite the fact that Washington and Beijing have agreed on the first part of the deal, this is just a small step towards ending the trade war. However, investors may gain more confidence in dollar shorts to a wide range of currencies if economic growth outside the US accelerates." they said.
In addition, the yield curve of American Treasuries inverted about four months ago, which usually with a time lag of twelve months signals the onset of a recession in the United States. Now, when US stock indices do not stop updating historical highs, and the Fed is talking about the strength of the economy, this seems unlikely, but the situation may change by August.
If the European economy begins to recover, and US GDP is facing a recession, the EUR/USD pair will confidently move up to 1.15. On the contrary, if the economy of the currency bloc continues to slow down, and the US GDP grows steadily and outpace international trade, the pair may return to 1.08–1.09 again.
The material has been provided by InstaForex Company - www.instaforex.com