The Euro: the euphoria is misplaced

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At the end of last week the single European currency against the dollar recorded a slight change, finishing a little above $ 1,165. The currency pair EUR/USD in the course of five days showed a V-shaped movement, while at the start of the week, the dollar in line with our expectations and showed growth through the drops and the deterrent in the form of geopolitical negative – Donald trump, recall, then spoke about the introduction of “very productive” talks with Pyongyang and the chance of a North Korean summit in the same date, June 12. Given the fact that in the United States last Monday was a stock output, in terms of pure market the strengthening of the dollar by inertia managed to gain a powerful momentum.
Furthermore, until the middle of the week marked pressure on the Euro had a political crisis in Italy, where differences in government circles about the composition of the government was threatened with new elections. In such circumstances, interesnoye sentiments have caused a strengthening of the so-called currency of refuge, namely the Japanese yen and Swiss franc; dollar index rising to highs from the first half of November and EUR/USD dipped to a 10-month bottom.
Therefore, a great relief for the Euro became the main news of the five days, Giuseppe Conte is finally able to present to the President of Italy Sergio Mattarella staged its list of candidates for the posts of Ministers, and on Friday the new government formed populist and right-wing forces came into authority.
The European single currency managed to rebound against the background relief of the acute condition in the politics of Italy, one of the largest economies of the region, however, we tend not to fall into euphoria – the coming to power of populist and right-wing radicals in itself is not a constructive development for the country, the more that they intend to seek changes in the rules governing the EU and the single currency; it is also proved by the fact that the Vice-Prime Minister of Italy on economic development and social policy is a 31-year-old worker with no higher education. Accordingly, we cannot say that the entry of the new Italian government authority takes risks for the dynamics of the Euro in the medium term.
Serious upheavals in the course of five days took place in Spain – the country’s Parliament passed a vote of no confidence in the government, Mariano Rajoy, after which the new Prime Minister became the leader of the ex opposition socialists, Pedro Sanchez, and the king of Spain has already taken his oath. Sanchez became the first Spanish Prime Minister, received the position as a result of a vote of no confidence.
The fact of the change of the person in the chair of Prime Minister will hardly bring the country a big relief in the Spanish Parliament a strong disagreement between the political forces, especially that of Sanchez party in Parliament included only 85 people (out of 350 seats). Such a controversial situation in the political arena of the country will also become a factor of pressure on Euro in the coming months.
The dollar mid-week, succumbed correctional drawdown after a prolonged phase of growth, and even “destructive” macroeconomic data released in the States at the end of five days, has not brought him to the correctional way.
Recall that employment in non-agricultural sectors of the United States in may has expanded to an impressive 223 thousand jobs with average forecasts for a gain of 188 thousand, while the unemployment rate unexpectedly decreased from 3.9% to 3.8%, and average hourly wages accelerated the growth rate from 0.1% to 0.3% while the index of economic conditions ISM in manufacturing sector of the U.S. in may increased significantly more than expected – from 57.3% to 58.7%.
Confident dynamics of macroeconomic indicators allowed the investment community to maintain a “hawkish” expectations of the fed’s policy – according to the FedWatch tool from CME Group, appreciate the players of the futures market, the probability of the fed rate hike in June is still about 90%, and further steps of monetary tightening is theoretically not excluded by the market in September and December.
Started the correctional movement of the dollar, in our view, at this stage still able to continue, but the return of the American currency on the trajectory of growth remains only a matter of time due to a significant fundamental advantage over Euro.
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Saidova Sarin,
A leading analyst of Department of the analysis of world markets,
CC “FINAM”