Fundamental Comment

Why will the euro drift lower in the coming period?

Why will the euro drift lower in the coming period?

The euro traded lower versus the US dollar, resuming its fall from its highest level since May 2018, as the common currency continues to provide signs of overbought ahead of Jackson Hole Symposium on Thursday.

It seems that the latest rally from the euro has fizzled out, as it has become extremely exhausted, where it is predicted to continue its downside correction in the coming period.

Some analysts even predict the euro to come back to 1.10 then 1.05, as it lacks any fundamentals that support further rise in its price against the green currency.

Data released on Friday showed that the pace of growth in business activity in the euro area slowed to 51.6 from July’s reading of 54.9, after slowdown in economic activities in both Germany and France, the region’s biggest economies.

The euro area’s leading services sector is still suffering from the repercussions of the coronavirus, where the rising number of Covid-19 infections across the old continent could hinder any attempts of economic recovery.

While recently the U.S. has eliminated new tariffs on some goods, it has still maintained 25 percent tariffs on more than 100 European products, thereby threatening exporters and growth in the euro region.

President Donald Trump is trying to gain more popularity ahead of the November Presidential elections by announcing measures that appear to be in the sake of the United States.

Hence, the US-China trade tensions will more likely to continue and may even elevate further, noting that the dollar has built its most recently bullish direction from haven demand due to the US-Sino trade war.

Both Republican and Democratic parties agree that a strong dollar will serve the interest of the economy, as it would largely reflect the good health of the economy as a whole.

Having a rally in both US stocks and the dollar over the long run is most probably one of the key targets of Presidential candidates.

Also, an election year is often a time of uncertainty, which may prompt traders and investors to resort to refuges, led by the US dollar, until knowing the outcome of the elections.

On Thursday, eyes will focus on the annual Jackson Hole Symposium, as Federal Reserve Chairman Jerome Powell is predicted to address tolerance for above-target inflation and the central bank’s view on monetary policy.

Another key pillar to the dollar is the fears that Congress members would not reach consensus on a new stimulus package, which means the green currency would avoid being overflooded in the market.

By the same manner, FOMC committee members showed skepticism in the latest Fed minutes about the usage of bond purchases to control the government bond yield curve.

In conclusion, there are ample evidence to believe the euro would continue its plummet, taking into consideration that the breach of the trend line of the upside channel could trigger strong sell off.

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