The Euro-dollar is back to two-month high despite the fact that the Fed will almost certainly raise rates in December. The pair is now trading above 1.19 dollar for one single euro coin. The ongoing political crisis in Germany did not have any impact yet on the single currency. In other words, markets give the sentiment that the economic impact that could stem from a political change in Germany is not relevant at this stage.
Concerning the US bond market, the 2-year US government bond continues to raise and is now at levels unseen since 2009 at 1.75%. However the back-end of the curve remains somewhat flat above 2.25% meaning that the inflation’s expectations are still very low.
In our view we believe that the inflation is underestimated and that the Fed should actually raise rates even higher, but the US central bank is perfectly aware that increasing rates would trigger turmoil in the bond market. This is why we believe that markets are very cautious concerning the dollar. The US monetary policy is likely to be back on the wait-and-see mode in 2018. For the time being, we believe that the Eurodollar has then more room for further appreciation.
By Yann Quelenn