The euro is in trouble
The past week wasn’t kind to the euro. The currency fell below 1.15 versus the US dollar. What are the reasons of this decline and what lies ahead?
Let’s start with the analysis of the economic picture for the single currency. There are many negative factors:
- Italian troubles. The European Commission said on Thursday that Italy’s 2019 budget draft is an “unprecedented” breach of EU budget rules. Investors fear the further escalation of political tensions in the euro area.
- German weakness. Angela Markel’s hold on power in the key European economy is declining as her main allies were defeated at the regional election in Bavaria.
- Economic alarm. The euro area’s and German ZEW economic sentiment indexes dropped sharply.
- External risks. Trade wars may hurt European exports. Plus, the region is vulnerable to a risk of ‘hard’ Brexit.
- Monetary policy. The European Central Bank is way behind the US central bank in normalizing its monetary policy. This puts the EUR at the disadvantage from investment point of view.
Next week there will be more turbulence for the euro:
- Key eurozone’s nations will release manufacturing and services PMI for October on Wednesday, October 24. These figures will offer a ‘fresh’ economic info. Weak figures will have a greater impact on the euro than the positive data.
- The ECB will meet on Thursday, October 25. The central bank will likely acknowledge Italian risks. Traders will worry that Italian crisis will affect the ECB’s policy. The market is now pricing in a smaller chance of a rate hike in September 2019 as their gaze switched to October 2019.
- S&P Global will review Italy's credit rating on Friday, October 26. Another top agency, Moody's, plans to announce Italy's rating at the end of October.
Let’s now look at the technical side of things. EUR/USD has revisited October lows. If it attempts to recover, there will be a strong selling pressure at 1.1535/50. Below 1.1430 the next target is at 1.13 (August lows and the area of 200-week MA).
Takeaway: look to sell at 1.1550 or 1.1425.
It seems that the only thing that may break this negative outlook for EUR/USD are some weak economic data from the US (core durable goods orders and advance GDP growth will come out next week) and a selloff in the USD on the fears of trade wars. Never the less, all things equal, the news from the euro area promise to be more interesting for the market in the upcoming days.