Currency Analyst since 2010

Mark Jensen: EUR/USD perception changed

  By Mark Jensen

EUR/USD started the week with declines getting farther away from resistance at $1.3450. This probably reflects the pessimism of the market players about the economic data due in the euro area later this week: the region will release flash Q2 GDP and final July CPI figures on Thursday.

According to the consensus forecast, euro area’s economic growth pace slowed down from 0.2% to 0.1%. Inflation is expected to remain at 0.4%, far from the ECB’s 2% target.

I think that the negative sentiment about euro is combined of 3 things. Firstly, traders think that the ECB will have to start an actual asset-purchase program at some point. Secondly, US yields are higher than those of Germany and this reduces appeal of the euro-denominated assets. And this latter difference in yields comes from the fact that the Fed is closer to raising interest rates than the ECB.

So, you may see how the fundamental perception of EUR/USD has changed over the recent months. In spring euro was supported by the monetary inflow to the euro area. I bet that investment in the region will decline and the funds turn to the US. In addition, the situation in Ukraine has dramatically escalated, and the euro zone is certainly much more exposed to its negative economic impact than the US.

So, as the technical factors point at EUR/USD downtrend, I expect the single currency to depreciate to 1.30 and probably even to 1.28 by the year-end. In the shorter term euro is vulnerable to the risk aversion, worse data from the euro area and better data from the US.

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