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13.02.2020 12:16 PM
EUR/USD: Strength of the buck

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At the beginning of the year, many experts predicted the weakening of the American currency and bet on the growth of EUR / USD against the background of a cease-fire in the trade war between the US and China, hopes for the recovery of the global and European economies, as well as expectations for the ECB's departure from a super soft monetary policy. However, the fall in the Euro against the US dollar in the past six weeks has cast doubt on these forecasts.

When everything is relatively calm in the world, exchange rates are sensitive to the monetary policy of central banks. When some external stimulus appears, they begin to assess the degree of stability of the national economy to its effects. In this regard, the year 2019 is indicative. Even against the background of a more aggressive easing of the Fed's monetary rate compared to the ECB, the greenback strengthened against the euro due to the reluctance of the American economy to cave in under the weight of the trade war in Washington and Beijing, which was particularly expressed in the steady growth of US stock indices. The Eurozone could not boast of this. A similar picture is observed now, where only the conflict in the Middle East took the place of the stimulus, and then the outbreak of coronavirus in China.

According to the calculations of Deutsche Bank specialists, the economic growth in China during the first quarter will slow down by 1.5%, to 4.6% due to the epidemic. World GDP is short of 0.5%, and Germany will lose more than the United States, given the degree of influence of the Chinese economy on the German. Everyone remembers what happened to the latter due to the impact of trade wars.

German GDP for the fourth quarter of 2019 will be released next Friday. Deutsche Bank predicts that the country's economic growth in the reporting period, as well as in the next quarterly quarter, will be negative, and this is already a technical recession. Accordingly, such economic statistics should force the ECB to go for additional stimulation, which is not the best news for the euro.

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If the coronavirus reaches its peak in February, then in March-April everyone will safely forget about it, and the Chinese GDP will accelerate sharply in the second quarter. However, in the short term, the eurozone economy will continue to receive negative from the epidemic, which creates the preconditions for a further reduction in EUR / USD.

The European Economic Surprise Index has reached its lowest level in the last four months, while its American counterpart is at its five-month peak. We need not wonder why the fall of the main currency pair reached below 1.09.

"The euro will only be able to sustainably strengthen after the eurozone economy shows more concrete signs of recovery," Wells Fargo's currency strategists said.

They revised the forecast for EUR / USD at the end of the first quarter of 2020 downward from 1.1200 to 1.0900.

The day before, the euro against the US dollar sank to its lowest level since May 2017 in the region of 1.0870.

"Technical analysis hints at the continuation of the bearish trend in the specified currency pair in the short term," Wells Fargo noted.

According to experts, a pause in the monetary policy of the Fed, as well as the fact that the economic prospects for the rest of the world look much more complicated than for the US, support the dollar.

Thus, until the euro fans have serious arguments to return to the idea of restoring the global and European economies, no one will guarantee that the main currency pair will not renew its three-year lows. Obviously, no one wants to "catch falling knives." Only an increase in EUR / USD above 1.0980 will bring the "bulls" to life.

Viktor Isakov,
Analytical expert of InstaForex
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