EURUSD Breaking to lower levels

Intermediate
  • Dollar bulls are looking for further gains against the Euro
  • The ECB has recognised the weakness of the Eurozone economy
  • The desirability of the Eurozone as a place to do business is shockingly low
  • Target EURUSD down to 1.0936

EURUSD posted losses over the past week and the chart at the end of this article suggests this decline could well gather pace even if there are technical levels of support nearby. This is a moment where I believe the broader fundamental scenario trumps the technical. The outlook is not good for the Euro; allow me to explain why.

The European Central Bank (ECB) has delayed the timing of its first-rate hike in nearly eight years to H2 2020 at the earliest. This is because of concerns about the growth and inflation outlook at a Eurozone level.

Gross Domestic Product (GDP) in the Eurozone expanded 0.40% in Q1 2019 over the previous quarter. That means the annual growth rate is stalled at 1.2% compared to the U.S. which has annual growth of 3.2%.

The annual inflation rate in the Eurozone is expected to fall to 1.2% in May 2019 from 1.7% in the previous month and below market expectations of 1.3%, preliminary estimates have shown. 

This is the lowest inflation rate since April last year, mainly due to a slowdown in cost of energy and services. Inflation has not been above the 2.0% target since October of last year. In contrast, the U.S. annual inflation rate rose to 2.0% in April 2019 from 1.9% in the previous month.

One feels for the ECB President, as over several years Mario Draghi has called upon the political leaders within the Eurozone to implement reforms within their domestic labour and industrial markets. His pleas have been unanswered

According to “Business Insider”, not one country within the Eurozone features in the “Top 10” global locations in which to do business. Of the major economies the U.S is ranked eighth and the U.K. ninth, despite the Brexit troubles that haunt the nation.

Of the leading four economies that are in the Eurozone the rankings send a stark signal that something is fundamentally wrong with the approach to business:

Germany 24th, Spain 30th, France 32nd and Italy a dismal 51st.

Looking ahead the Eurozone interest rate outlook is for rates to stay at super accommodative levels until 20220 or even 2021. The only real policy tool left in the box is more asset purchases.

Sadly, that will do nothing to address the level of complacency in the Euro denominated sovereign debt market. If the ECB acts as a buyer of last resort, Italy, Spain, France and Greece will continue to swell their debt burden knowing private investors will buy in the belief that the ECB is the backstop bid.

eurusd

Source: www.tradingeconomics.com , Spotlight Ideas

The chart above shows the EURUSD has closed at 1.1209 just above the 38.2% support level at 1.1200. The technical sentiment is loaded with “Strong Sell” signals and as such I would expect the EURUSD to yield ground.

Summary:

Stay short or sell at opening

Target 1 1.1109 Target 2 1.0936

Stop at 1.1260

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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