Currency Analyst since 2010

EUR/USD and factors affecting it

By Elizaveta Belugina

During the past week EUR/USD has lost about 350 pips from its peak at $1.3990 reached on May 7. Euro’s uptrend since the middle of 2013 is now in danger.

Fundamental factors:

  1. Mario Draghi’s speech last week which should be taken pretty seriously. The ECB Executive Board member Yves Mersch said yesterday that Draghi’s words mean the same as the “strong vigilance” phrase used by the previous ECB President Jean-Claude Trichet – a code indicating the rate action at the following meeting. In addition, German Bundesbank, which is known to disagree with the ECB’s soft policy stance, has voiced its readiness for action. All in all, the ECB members sound very much alike and this increases the chances of the policy change on June 5. The ECB underlined that its decision will be based on the staff economic projections due at the beginning of June.
  2. There are more and more expectations that the ECB will rather do a package of measures rather than a simple rate cut. Such package may include cuts in the both credit and deposit rates (into negative), suspension of the SMP sterilization, a new round of longer-dated LTRO and a small scale asset purchase program.
  3. Disappointing economic figures in the euro area: the region’s growth is lower than expected; there’s divergence in the performance of the euro zone’s major economies; the risk of deflation persists.

Technical factors:

The single currency breached support of the 55-, 100- day MAs and that of the daily Ichimoku Cloud, as well as the trend line connecting July 2013, February and April 2014 lows. As for support, there’s $1.3620 (200-day MA) and $1.3580 (100-month MA). Resistance is at $1.3725/40 and $1.3800/15.

Conclusion: It seems that euro on its part lacks positive news. The only support may come from the US. The declining US Treasury yields may create such support for EUR/USD – as long as they decline faster than the European yields. US yields may fall even lower in case of weaker US data. EUR/USD is vulnerable for decline to $1.3600 and even $1.3500 (38.2% Fibo). One may also consider EUR/GBP shorts.

Chart. Daily EUR/USD

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