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The two leading central banks of the world exchanged curtsies, after which a weak report on US employment allowed the "bulls" on EUR/USD to inflate quotes to a 10-week high. It is so briefly possible to sum up the first week of summer on Forex. Indeed, the statements of Lael Brainard, Jerome Powell, and John Williams that if the macroeconomic situation deteriorates in the States, the Fed will have to adjust monetary policy, hit the US dollar hard. In contrast to the beginning of the year, when the testimony of the derivatives market was contrary to the statements of FOMC officials, in May-June, everything changed. The Central Bank seriously thought about lowering the rate, and disappointing statistics on the labor market only added fuel to the fire of correction of the USD index.
In May, employment outside the agricultural sector grew by a modest 75 thousand, which is worse than the average for January-April (190 thousand), and forecasts of Bloomberg experts (185 thousand). The effects of the US government shutdown in late 2018 are finally beginning to manifest themselves, however, this is not the only reason for the slowdown of the indicator. If we consider its structure, the main problems are related to the production sphere. It is he who feels the greatest negative consequences of trade wars. Donald Trump's protectionism strikes not only the global but also the American economy, forcing the Fed to think about the weakening of monetary policy.
This circumstance, paired with the increased risks of recession, forces investors to buy bonds. At the end of the week, by May 31, the inflow of net capital into debt-oriented high investment grade ETF funds reached a historic high of $18.5 billion. The yield of 10-year US securities fell to its lowest level since 2017 and, according to Commerzbank, will fall to 1.25% by the end of this year. Rates on German bonds will not fall so seriously that will narrow the yield differential and will contribute to the growth of EUR/USD.
Dynamics of the yield of US bonds
For a long time, the market has grabbed the US dollar with two hands and now intends to sell it. Against this background, the ECB's attempts to drown the euro look like a waste of time. Mario Draghi at a press conference following the June meeting of the Governing Council made every effort to save the "bears" on EUR/USD: he hinted at a rate cut and resuscitation of the asset purchase program. It did not help. Investors are well aware of the pain caused by negative rates to European banks. As for QE, if it did not produce results in the form of achieving the inflation target of 2% earlier, why should it be effective now?
In my opinion, the market still hopes for the de-escalation of the conflict between the US and China after the meeting of Donald Trump and Xi Jinping at the G20 summit, believes that the current tariffs will soon be canceled, which will have a positive impact on the economies of China and the Eurozone.
Technically, the expanding wedge pattern was activated on the EUR/USD daily chart. Pullbacks in the direction of 23.6%, 38.2% and 50% of the CD wave allowed to form a long position.
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