The G20 summit took place in Bali, Indonesia, on November 2022…
How low will EUR/USD sink?
Information is not investment advice
Economic problems in the euro area
Even if you don’t follow the European news closely, you’ve still probably heard that the region’s economy is going through difficult times. In February, there were many disappointing releases: retail sales contracted by 1.6%, and industrial production fell by 2.1%. Germany, which is the leading economy of the euro area, posted flat economic growth in the Q4. The country’s Economic Sentiment Index dropped to 34-month low. It’s really hard to find even the smallest ray of sunshine in the data, which is coming from Europe.
The figures published in the United States, on the contrary, look much better. As a result, it’s not surprising that investors prefer the USD to the EUR and sell EUR/USD. Different approaches of the European Central Bank and the Federal Reserve stresses the situation. The ECB is keeping a very loose monetary policy and hints on the possibility of yet additional easing. The Fed has so far been calmer and more positive.
Finally, the market currently thinks that the United States is more resilient to the coronavirus outbreak than other regions and that includes the euro zone. Increase in risk aversion because of the spreading disease is a negative factor for the EUR.
This week, we’ll get insights from both central banks. The FOMC meeting minutes are due at 21:00 MT time on Wednesday, February 19. The accounts of the ECB meeting will be released at 14:30 MT time on Thursday, February 20. The policymakers edit the document before publication and may decide to emphasize particular things, thus making the price of the EUR move. In addition, keep an eye on the euro area’s flash manufacturing and services PMIs on Friday, February 21 – these are the freshest indicators of the euro area’s economic health.
Technical picture for EUR/USD
EUR/USD dropped to the lowest levels since April 2017 and is currently testing levels below the 78.6% Fibonacci of the 2016-2018 advance at 1.0815. The weekly close below this level will be bearish. Of course, after the two weeks of heavy declines the euro looks oversold in the short-term. However, given the bleak European fundamentals, attempts to “catch the falling knife”, i.e. the euro, would be very risky. The near-term picture will remain bearish as long as the pair is trading below 1.0880.
If EUR/USD stays below 1.0800, the coronavirus keeps spreading and the economic figures remain weak, the pair has every chance to settle in the new range between 1.06 and 1.04. If the price manages to get above 1.0880, the next resistance levels will be at 1.0980 and 1.1100.
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This week, there are a few high-probability trade ideas I'd like to recommend to you. Trading these setups, be sure to implement a proper risk management approach.
On Thursday, the 2nd of February, the Bank of England will publish its report concerning interest rates and inflation data for the Eurozone. Professionals and investors anticipate that Andrew Bailey’s lead team of policy makers will likely raise interest rates to 4%; the highest in over a decade, for the tenth time in a row.
The first FOMC meeting comes after a buildup of anticipation from traders and investors alike, as the markets await what posture the Fed will take regarding the interest rates; would there be a hike or a cut in interest rates? Recall that the Federal Open Market Committee had previously ended the year 2022 with a 50bps hike, and an indication from Powell, the committee chairman, that the Fed could consider raising interest rates by 75bps in the course of the year 2023.