Euro vs. Dollar
Heavyweight Match Up of the Year!
The heavy weight bout of the year (to-date) is taking place right now. We’re talking about the Euro and how it is valued against the U.S. Dollar. As we have recently been reporting, the Euro is under a great deal of stress right now due to Brexit and the political issues currently facing multiple EU members.
Some more pressure was applied to the Euro this week when the ECB indicated that it has no intention to withdraw its massive stimulus program. Couple this with stronger than anticipated economic news for the United States, resulting in a slight strengthening of the Dollar, and the Euro appears ripe for continued weakening against the Greenback.
New EU Numbers…
Numbers just released by the EU reflecting its March confidence figures shows the actual numbers were lower than the published expectations. The economic sentiment indicator came in at 107.9, below the previous 108.00 and well below the expected 108.2. Consumer confidence however remained unchanged at -5.
Pending March inflation numbers have yet to be released yet they are expected to have advanced less than during February. Unless the final revision of the US Q4 GDP is substantially greater than the previous estimate of 1.9%, it is expected this updated data will have little or no effect on the currency pairing.
ECB Hammer about to DROP…
It is expected by most currency analysts that the Euro exchange rate values are about to be hit by Thor’s Hammer in the shape of the European Central Bank as analysts from a prominent Scandinavian economic research house has suggested that another round of quantitative easing is about to enacted.
Many economists believe that in the coming months, the ECB will begin releasing warning statements that another such effort will be needed to stabilize several member economies, with the ECB taking a more hawkish stance by the end of this year.
It is important to remember that the common belief was that the ECB was poised to begin shutting down the quantitative easing program? The value of the Euro was essentially based on this assumption. Now however, if the ECB shifts its stance (as expected) this could trigger additional (notable) weakening of the Euro.
Having said that, it is important to recall that the Euro plunged in December when the ECB announced another extension to the quantitative easing program. If this was a formula for the Euro dipping then…it is expected a repeat could be in the cards!
An Unexpected Inflation Deviation
At this point, the 2% inflation target as set by the ECB looks more and more unlikely. In fact, it appears that inflation is headed in the opposite direction from where the European Central Bank needs it to go.
The most recent inflation data for Germany, Spain and Belgium indicates that the Eurozone inflation rate has dropped back to levels well below 2% in March. In fact, HICP indicates that the German inflation rate declined to 1.5% down from 2.2% in February…when markets had actually forecast a rise of 1.9%
In Spain it actually dropped to 2.1% from 3.0% and Belgium recorded a decline to 2.3% from 3.0%. This published inflation data again indicates another factor in the Euro’s underperformance and underscores again why the ECB is not keen on withdrawing its stimulus at this time.
If you look at the current Euro exchange rate, it is obvious that we are seeing a reaction to several factors including news the ECB is very concerned with the direction inflation is headed. It is also likely that the ECB is equally unhappy with the market’s reaction to their March policy meeting.
EURO/USD Slipping Below Parity?
Citibank also sees more bad news on the horizon for the Euro. These analysts are suggesting that the current price action for the EUR/USD is remarkably consistent with what we realized in October and November of 1999, thus suggesting “…we will see levels below parity over the medium term.”
At that time, the market entered a short EUR/USD position. If history repeats itself and the EUR/USD falls below parity you can be assured that the EUR/GBP may fall sharply too owning to those same correlations.
THE BOTTOM LINE…
U.S. economic data has been quite strong in recent weeks. Durable Goods Orders are reflecting robust gains, New Home Sales have risen 6.1% and the Current Account deficit is shrinking…..all potentially positive indicators for the Greenback moving forward.
The March Personal Consumption Expenditure (PCE) numbers as released reflect a 1.8% rate… beating February’s 1.7% yet still below a hoped for 2.0%. When this data is coupled with the Michigan Sentiment Rating of 96.9, up from February’s 96.3 the overall effect is considered negligible regarding its impact on the Dollar.
Overall, the Dollar may continue to strengthen against a basket of currencies in the near term and specifically against the Euro. When you consider the overall volume of data that must be collected and correlated to effectively manage currency trading today, it is even more obvious that working with a preeminent foreign exchange partner like Mosaica FX is even more essential.
Let us prove our worth to you today. Contact one of our experienced currency trading Managers for a briefing on how you should manage your currency trading in today’s market.