Record highs fuel demand for greenback and contribute to lower quotes

It is very difficult to compete with a currency that can benefit from both the escalation and the de-escalation of the Trade Conflict between the United States and China. Especially in the conditions when not monetary policy, and trade war is the main driver of exchange rate formation on Forex. The US dollar strengthened against the euro in 8 out of 9 months until October. The heightened tensions between the U.S. and China have contributed to increased demand for both asset-seekers, a thaw in relations has increased investor interest in U.S. securities, ensured capital outflows from the Old to the New World and led to a drop in quotes.

According to EPFR Global, by the end of the week to November 6, capital inflows into equity-focused ETFs reached $7.5 billion, the highest level in almost two years. At the same time, the report of the Ministry of Commerce of China that Beijing and Washington agreed to roll back tariffs in order to sign the agreement under Phase 1, allowed to rewrite the historical maximum, and the yields of U.S. Treasury bonds to rise above 1.95%. A strong economy, moderate-accommodation policy of the Fed and reduction of global risks strengthen the attractiveness of U.S. securities and demand for the dollar.

Dynamics of capital flows to equity-focused ETFs

Dynamics of capital flows to equity-focused ETFs

Source: Financial Times.

While in October the bulls’ support for the main currency pair was supported by expectations of a reduction in the federal funds rate and disappointing statistics on the States, in November the situation changed. According to Rafael Bostic, president of the Federal Reserve Bank of Atlanta, if he had the right to vote, he would have made a forgiving of the easing of monetary policy at the last meeting of the FOMC. Most Fed officials say they feel comfortable with current rates. At the same time, about half of the 57 experts of the Wall Street Journal believe that the Federal Reserve has provided the right amount of incentives to maintain the current GDP growth rate, 40.4% believe that it has done more than necessary. Only 9.6% of respondents are in favor of continued monetary expansion. Thanks to preventive measures from the central bank, the probability of recession, according to economists, decreased from 34.2% in the October survey to 30.2%.

The probability of a recession in the U.S. economy

The probability of a recession in the U.S. economy

The probability of a recession in the U.S. economy

Source: Wall Street Journal.

If we talk about the long-term prospects, the elimination of such negative factors as the trade war and Brexit will allow us to count on a gradual recovery of the European economy and sooner or later will extend a helping hand to the bulls. In the meantime, it is not necessary to hope for the same confident growth of the pair, as it was in October. Moreover, the next pig of the euro planted the German . The index fell by 0.4% m/m in September and, according to Capital Economics, will deduct from 0.25 p.p. in the third quarter.

The quotations of the main currency pair fall for the fourth day in a row, and if the “bears” manage to take by storm support by 1,104, the risks of continuing the southern hike to 1.0965 will increase. The rebound from an important level will allow the Bulls to recover and, with the emergence of new growth drivers, go to the counterattack.

Dmitry Demidenko for LiteForex