The EUR/USD currency pair has seen a significant reversal, pulling back from its recent multi-year high above 1.1400. By the end of the week, the pair was quite firmly in the 1.1360 area. All of this outperformance happened against the backdrop of a weakening US Dollar. There are a number of reasons pushing the Greenback’s decline. We’re witnessing disappointing economic indicators, fears of a precarious stagflation, and panic from protracted global trade conflicts, most notably between the U.S. and China.
The Greenback is dying at the moment. Analysts claim that a sudden decline can be partly attributed to the lackluster economic indicators and growing fears of a recession in the United States. Adding fuel to this fire have been recent reports obsessing over softer-than-expected US Producer Price Index (PPI) data. As the US economy faces down the prospect of stagnation, traders are growing concerned at the impact on potential currency performance.
As opposed to all of this, the GBP/USD pair has been pretty strong, though it has retraced at least some of its prior gains. The currency was subsequently able to make fresh highs in the area of 1.3150 before backing off. Whether it’s due to interest rate speculation, political pressure, or elsewise, the volatility in GBP/USD underscores continuing market uncertainty. This ambiguity is deeply tied to the macroeconomic picture and the strength of the US Dollar.
Both of these developments have St. Louis Federal Reserve President Alberto Musalem keeping a hawkish eye on inflation expectations. He worried that a rise in short-term inflation expectations might eventually lead to an increase in longer-term expectations. This situation would further inhibit the ongoing battle against inflation. It will likely prevent the Federal Reserve from making the necessary moves to respond to persistent weaknesses in the labor market.
Lingering geopolitical tensions, in the form of the ongoing trade war between the U.S. and China, are preventing further progress in the market. As such, uncertainty and unpredictability related to the state of US trade negotiations add to the overall US Dollar volatility picture. The Fed’s policy position is completely prepared to address all of these risks. Analysts caution that increasing hawkishness could make future monetary policy choices more difficult.
The economic development world has shifted dramatically. Market participants will be closely watching any new movement that would impact the valuation of the currency. Our domestic economic reality and current global trade dynamics are slated to collide in the coming weeks. This dynamic is going to be the most important factor in determining investor sentiment and driving currency trends.