EUR/USD: 5 reasons to fade this recovery - a sell opportunity?


  • The EUR/USD is recovering from the lows and finds some reasons to rise.
  • However, this may only be a temporary, as the pair has reasons to fall.
  • Here are five reasons to fade this current recovery.

The EUR/USD is on the rise, trading above 1.1700 and contrary to previous days, not losing ground at the wake of the American session. Hopes that Italy will have a moderate finance minister and the relatively dovish meeting minutes both send the pair higher.

But there are reasons to doubt the move:

1) The Italian saga is not over 

Luigi Zingales, the moderate, has not been named Finance Minister. Hopes for his nomination are already lower after The League said that Paolo Savona, the Euroskeptic, is still their candidate. And even if Zinglaes is nominated, he may still be serving the interests of the populist League and the 5-Star Movement. It is important to note that the Prime Minister-designate Giuseppe Conte has no political experience and could be the populists' puppet. Zingales or any other candidate for FinMin could have the same fate.

2) The Fed is still raising rates

The Fed's meeting minutes showed that members will allow for slightly higher inflation. This dovish tone does not mean they will not raise interest rates. They said they will raise rates "soon", which means a hike in June. In addition, they are still bent on increasing rates at least once more this year and several times in 2019. 

3) Trade wars

Each time the Trump Administration makes some kind of concessions or voices optimism on trade relations, they follow up with a retreat to the tough stance. NAFTA talks seemed to be close to an end. Relations with China dramatically improved over the weekend only to sour again.

Just the talk about these issues weighs on sentiment. We are seeing the considerable gains of the safe-haven Japanese Yen and the US Dollar also gaining ground. Without any change of attitude at the White House, trade issues will likely push the USD higher against the Euro. The recent idea to impose higher tariffs on car imports while China is lowering them shows that Trump and team are in for a fight. 

4) Profit taking 

Forex trading is never a straight line. There are always pullbacks and corrections within a trend. And with this specific trend, we have already seen quite a few "dead cat bounces" in which the EUR/USD moved up just a bit only to fall once again. The current bounce may be slightly more significant, but the character may be exactly the same.

5) US bonds still set to rise

The 10-year benchmark has dropped from the highs of 3.13% to dip below 3%. Also here, we see some profit taking. The rise of bonds, which in turn support the Dollar, do not stem only from Fed hikes. They are also a result of the government's policies: lower taxes and higher spending (to please all members of Congress) mean the government needs more money. Trump is also considering further cuts in November. The Treasury's growing funding needs mean a higher supply of bonds, thus a lower price and higher yields. This trend is unlikely to stop.

More: EUR/USD recovery seen capped at 1.1747, a fall could end below 1.1600 — Confluence Detector

 

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