Geopolitics and growing risks of a constitutional crisis weigh on the EUR/USD

If the greenback is strengthening amid the rally of the US stock indexes, how deep could the EUR/USD drop if the S&P 500 trend turns down? The buyers of stocks are not discouraged by the bad news from Germany about s surge in the new cases of coronavirus as the economy was partially reopened, growing pessimism about the recovery of the US GDP, or by a potential escalation of the US-China trade war. Besides, the euro is pressed down by the turmoil in the EU judicial system that might result in a constitutional crisis. 

The major growth driver for the S&P 500 is the unwillingness of investors to go against the Fed that is actively stimulating the US economy. They hope that corporate profits will be 13% up in the first quarter of 2021. Besides, analysts suggest a chance that the US stock indexes could rise to all-time highs (JP Morgan, for example, says it will occur in the first half of 2021). Investors are bullish on the sector leaders that, unlike other companies’ stocks, are growing steadily. In fact, the US economic rebound to the pre-crisis pace may be U-, W-, Z- or L-shaped. Investors more often support the idea that the US GDP won’t quickly rebound. It could take months or even years.

Shapes of the GDP recovery 

LiteForex: EURUSD forecast for 12.05.2020


Source: Wall Street Journal

One of the drivers of the US stocks sell-off and the growth of the demand for safe-havens, including the US dollar, can be the escalation of the US-China trade war. Washington and Beijing seem to have agreed on the fulfilling obligations under the trade deal signed in January, and China is starting to increase purchases of US soy and pork, reducing Brazilian and Australian imports of these products, but there are distressing talks among investors. Allegedly, China has ended with diplomacy and is switching to the policy of bullying. In response to the charges of the alleged laboratory origin of COVID-19, the Chinese officials point to the elderly coronavirus patients abandoned in France’s nursing homes. Also, China’s media spread conspiracy theories suggesting that the USA created the virus to destroy China. China also threatens to block the imports of Australia’s goods as Canberra is going to investigate the virus origins; it also encourages Wellington and Prague for public praise by donating masks and equipment. 

Beijing behaves as it did after the 2007-2009 crisis when China was going to outperform the U.S. and Europe. Donald Trump doesn’t like it. He says he is going to halt the further talks with China and should revise the provisions of the phase-one trade deal signed in January. 

In addition to the potential sell-offs in the stock market and geopolitical issues, there are disputes between the EU members. Therefore, the EUR/USD is getting more likely to drop below the important support at 1.077-1.0775. After a tough response of the European Court to the German constitutional court, the European Commission could open a legal case against Germany over the violating EU legislation. The situation is alarming. Will the euro stay on the edge of the abyss?

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Price chart of EURUSD in real time mode

Euro is dangerously close to the line

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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