If the greenback strengthens amid a rally of US stock indexes, then where will the EUR / USD collapse if the S&P 500 starts to fall? Neither the sad news from Germany about the geometrical increase in the number of people infected after partially removing the economic lock-up, nor the growing pessimism about the restoration of American GDP, nor the cat that ran between Washington and Beijing stop the buyers of the shares. At the same time, pressure on the euro continues to be confused in the judicial system of Europe, threatening to develop into a constitutional crisis.
The main drivers of the S&P 500 rally are the reluctance of investors to go against the Fed actively stimulating the economy; hopes for a rebound in corporate profits in the first quarter of 2021 by 13%; positive forecasts about the ability of stock indices to return to historical highs (for example, JP Morgan believes that this will happen in the first half of next year); bet on leaders of sectors, which, unlike shares of other companies, are growing steadily; and finally, faith in the V-shaped recovery of US GDP. In fact, the return of the American economy to its previous growth rates may take a U-, W-, Z- or L-shape, and more and more investors are inclined to think that one should not count on a quick rebound in GDP. This process will take months. It would be good if not for years.
Forms of GDP recovery
Source: Wall Street Journal.
One of the drivers for the sale of US stocks and the growth in demand for safe haven assets, including the US dollar, may be the escalation of the trade conflict. Washington and Beijing seem to have expressed confidence in fulfilling obligations under the January trade agreement, China is starting to increase purchases of American soy and pork by reducing Brazilian and Australian imports of these products, but unpleasant rumors continue to circulate in the market. Say, the Celestial Empire has finished with diplomacy and is moving on to a policy of intimidation. In response to allegations of the alleged laboratory origin of the coronavirus, she points her finger at COVID-19 patients abandoned in French nursing homes; spreads conspiracy theories that the United States allegedly created an infection to destroy China; threatens to boycott Australian products for Canberra’s intention to investigate the causes of the virus; encourages Wellington and Prague to supply masks for public praise.
Beijing behaves like after the crisis of 2007-2009, when it sincerely believed in its ability to eclipse the decaying West in the face of the United States and Europe. And this is clearly not like Donald Trump, who announced his protest at the beginning of a dialogue with the Celestial Empire on the revision of the terms of the January trade agreement in the framework of phase No. 1.
If we add to the risks of sales on the stock market and geopolitics a split factor in the EU, then the fall of EUR / USD below the important support by 1.077-1.0775 starts to look more and more real. After a harsh response from the European Court to the German Constitutional Court, Brussels begins to threaten Berlin with the initiation of a procedure for violating EU legislation by Germany. It smells like kerosene. Will the euro be able to stay on the edge of the abyss?