FOREX Fundamental analysis for EUR/USD on November 18, 2024
The return of Donald Trump to the White House has brought the theme of American exceptionalism back to world markets. Shares of companies from the United States are showing more rapid growth compared to European ones, and the yield of American debt bonds (treasuries) is significantly ahead of the performance of German bonds. These differences increase the outflow of capital from Europe to the United States, which pushes the EUR/USD exchange rate closer to parity.
Against the background of expectations of fiscal incentives from the Republican administration, the S&P 500 index has gained 23% since the beginning of the year, while the EuroStoxx 600 has risen by only 5%. European equity markets remain under pressure due to concerns related to import tariffs and trade conflicts, and the euro is under pressure through currency correlation. The gap in dynamics between the Old and the New World has reached record levels, which has already been informally called the "Trump gap."
During his previous presidency, Donald Trump viewed the growth of the stock market as an indicator of the success of his own policies. Investors expect that the president will avoid actions that could harm the upward trajectory of the indices, which stimulates a rally in American markets.
The increase in the yield of treasuries is largely due to expectations of an increase in the budget deficit due to new fiscal measures, as well as the stable state of the American economy. In October, retail sales increased by 0.4%, exceeding forecasts, while data for September were revised upward from 0.4% to 0.8%.
The situation in Europe is not optimistic at all. The German economy, according to recent estimates, is at risk of entering a recession. Experts predict a 0.1% decline in GDP in 2024 after a 0.3% decline in 2023. This constrains the growth of German bond yields and strengthens the gap in rates with American debt instruments, which plays into the hands of EUR/USD sellers.
The US dollar continues to strengthen, showing a seven—week rally - the longest since February. Previously, the growth was associated with a revision of market expectations about the softness of the Fed's monetary policy, and now the situation is developing in a similar way. Forecasts for 2025 suggest only three Fed rate cuts of 25 bps instead of the six previously expected.
Thus, the strength of the American economy, capital outflow from Europe and the Fed's more restrained approach to monetary policy easing continue to put pressure on the EUR/USD exchange rate. The only hope for the euro remains the correction of the S&P 500 index, but it is unlikely to be prolonged. We are holding sales with a target of $1,035.