Brace for Euro to USD Crunch
Since the beginning of 2016, the euro has increased slightly in value. However, don’t for a second believe that this trend will continue. The EUR to USD exchange rate could be hitting parity in 2016.
In fact, all the stars are lining up for a big downside on the EUR to USD.
First of all, look at the long-term chart below.
Chart courtesy of www.StockCharts.com
No matter how you look at it, the long-term trend on the EUR to USD currency pair is pointing downward. To confirm, look at the 200-week moving average (the blue line in the chart above). It remains well above the current price and suggests that the pessimism toward the currency pair is significant.
For a look at the short-term outlook, consider the black line on the chart above. Notice something interesting? The EUR/USD continues to find a significant amount of resistance around the 1.15 level. Since April 2015, this level has been tested at least six times and failed to break lower!
Here’s how I am looking at this: The chart is screaming there are many sellers at the 1.15 level. Also, this is nothing but consolidation to the already existing downtrend that began in 2008. The downside move could resume soon.
But technical analysis isn’t the only thing that’s painting a gruesome picture for the EUR to USD exchange rate going forward. The European Central Bank (ECB) is sending out some negative signals as well.
You see, just recently, the Governing Council of the ECB met and decided to keep its interest rates the same, so the deposit rate still stands at -0.4%. This was not a surprise at all. The mainstream was reporting on this left, right, and center.
Here’s what you probably didn’t hear, though—and I quote exactly from the ECB: “Today the Governing Council of the European Central Bank (ECB) decided that purchases under its corporate sector purchase programme (CSPP) will start on June 8, 2016. The Governing Council also took decisions on the remaining details of the CSPP. The CSPP is a new programme added to the existing elements of the asset purchase programme that will strengthen the pass-through of asset purchases to the real economy.” (Source: “ECB announces remaining details of the corporate sector purchase programme (CSPP),” European Central Bank, June 2, 2016.)
That’s a lot to take in, so let me put it into simpler words: the ECB will be buying corporate debt now, too, instead of just government debt.
Call it a “game-changer” if you want, but I am asking one simple question: The ECB has been printing €80 billion a month to buy bonds. Now, throwing corporate bonds into the mix, couldn’t it just increase this amount much higher? Maybe to, say, €100 billion a month? It’s possible.
If this is actually the case, the euro could easily fall further.
Also, pay attention to the expected growth of the eurozone.
The ECB projects the common currency region will grow by 1.6% in 2016 and 1.7% in both 2017 and 2018. (Source: “Eurosystem staff macroeconomic projections for the euro area,” European Central Bank, last accessed June 2, 2016.)
This is well below its historical growth rates. Remember: economic growth matters a lot when it comes to currencies. Dismal growth could weigh heavily on the direction of the EUR to USD pair.
EUR to Dollar Outlook for 2016
As it stands, if you look at all the factors, the odds of major downside on the EUR to USD rate are stacking higher by the day. In my opinion, parity is still a very possible scenario by the end of 2016.
Let me leave you with just this one warning: if you are long on the EUR to USD currency pair, you could be making a big mistake.