Factors such as persistent downward pressure on inflation, low growth and demographic challenges are forcing authorities to continue to raise debt levels to prevent the house of cards from collapsing – while the political and economic pillars underpinning the house are becoming increasingly shaky. This might even require the redefining of safe-haven assets.
The increase in EUR/USD thus far has been disappointing given the decreasing interest rate differentials between the US and the Eurozone. Is the euro a weak currency or is the dollar a surprisingly resilient currency in the face of multiple rate cuts and quantitative easing by the Fed?
The remaining upside potential for long-term rates is limited as we expect the current market optimism will give way to increasing political tensions, doubts about monetary policy effectiveness and a lack of sufficient fiscal easing.
The long-term interest rates are appreciating as a result of de-escalation of the trade war and the expectation that this will boost the confidence of companies and consumers. However, the question is whether upward pressure on interest rates will continue, because the underlying economic growth is deteriorating rather than improving.