EUR/USD: bearish sentiment prevails
The euro area is now frequently compared with Japan. Last year the Bank of Japan has launched an enormous monetary stimulus program in order to encourage inflation. This made investors buy Japanese shares and sell the yen.
The same can be now seen in Europe. The ECB has started its more than 1-trillion-euro QE on March 9. Bond yields in many countries of the euro area fell close to the record lows. As a result, European investors are going elsewhere for higher returns. Low interest rates made the region’s stock market surge. However, foreign investors sell the euro in order to hedge their European assets. The supply of the single currency is increasing because of the QE, while the demand for it remains week. As a result, it hit 12-year lows against the greenback. Analysts revised down their forecasts for EUR/USD targeting parity and lower.
The pair will likely remain under pressure. 3 negative factors are affecting the euro: low oil prices, the ECB’s QE and the expectations of the US Federal Reserve’s rate hike this summer. Although the currency is oversold and there’s an ever-present risk of a short covering rally, the key is now the market’s sentiment, and that is quite bearish.
EUR/USD made it down from above 1.0800 to 1.0500. Correction towards 1.0700 on Thursday allowed traders to take profit. If support at 1.0500 fails, the euro will fall to 1.0200. In the short-term resistance will be limited by 1.0830 and 1.1090. Our recommendation is still to sell on correction up or on the break of the support.
Given the fast speed of decline and the upcoming Fed’s meeting on Wednesday, we’ll probably see some consolidation in EUR/USD, especially in the first half of the week. Pay attention to the release of the euro area’s and German economic sentiment figures on Tuesday and the ECB’s new tranche of TLTRO for the euro area’s banks on Thursday.