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How Far Can EURO Fall?

  • Kathy Lien
  • 14 February 2020

How Far Can EURO Fall?

 

Daily FX Market Roundup Feb 13, 2020

 

Everyone wants to know how much further the euro can fall. Not only has it been in a downtrend since the beginning of the month, but it lost value 8 out of the last 9 trading days and on the one day that it rallied, the increase was modest at best.  Investors have beaten the currency down to its lowest level since April 2017. In order to gage how much further the pair can fall, we have to understand why its losing value as quickly as we've seen. 

 

6 Reasons for EURO's decline

 

We can identify at least six reasons for EUR/USD's decline and they mostly have to do with divergence between the EZ and US economies

 

1.     ECB defends the need for low rates and teases the possibility of more stimulus.  Whereas the Fed is comfortable maintain steady policy.

2.     Eurozone data taken a turn for the worse with EZ industrial production tumbling sharply.  

3.     Concerns that Friday's GE and EZ Q4 growth will be weak while US retail sales could be strong

4.     The EZ economy is more manufacturing driven and therefore more vulnerable to Chinese slowdown than the US   

5.     Low interest rates makes EURO attractive funding currency

6.     Whereas Dollar catches safe haven bid as coronavirus intensifies

 

Since data will most likely show the divergence between the eurozone and US economies widening in the coming weeks, further losses are likely.   The next major support level for EUR/USD is 1.05 but the decline could also ease around 1.0800, an area that contained losses in early 2016 and mid 2015. 

 

When it comes to trading, fighting trends can be futile.When the euro bottoms, the turn will be meaningful so for the time being its better to go with the trend than to fade it.  The spike in coronavirus cases doesn't help. Euro is a high beta currency that suffers when there is risk aversion. 

 

In fact, all of the major currencies traded lower on Thursday on the back of the coronavirus news. Positive comments from the Reserve Bank of New Zealand and the Bank of Canada failed to prevent losses in either currency. However when push comes to shove, we expect NZD and CAD to outperform its peers as those central banks downplay the virus' impact.  It should also be only a matter of time before USD/JPY sees more losses.  The greenback is catching a safe haven bid but 110 is proving to be stiff resistance.  If equities continue to slide and Treasury yields follow, we should see a move below 109.50 fairly quickly. 

 

Last but certainly not least, sterling went on a rollercoaster ride following the resignation of finance minister Sajid Javid. The announcement came as a surprise and was a protest against Prime Minister Johnson's staff changes. GBP/USD plunged below 1.29 in response but recovered after he was quickly replaced by Rishi Sunak, a son-in-law of a billionaire with extensive financial market experience. Sunak is also seen as a rising start in the Conservative Party.  Sterling rallied on the hope that the new Chancellor will loosen the purse strings and provide a more expansive budget. He's long supported lower taxes and more infrastructure spending. 

 

 

For more information, they can be reached at http://www.bkforex.com/.

 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.