Here’s How the EUR to U.S. Dollar Exchange Rate Gets to Parity
Since the beginning of 2016, the EUR to USD pair has increased more than five percent. Don’t trust this rally too much. The euro to U.S. dollar exchange rate could be headed towards parity—and 2016 could be the year it happens.
But first things first, according to technical analysis, if you are EUR to USD buyer, you could be making a big mistake for your portfolio. Take a look at the long-term chart below of the EUR to U.S. dollar exchange rate and pay close attention to the black line.
You see, one of the basic rules of technical analysis is that “the trend is your friend, until it’s broken.” Over the last seven years at least, the EUR to USD exchange rate has been trending lower. It would be deadly to even thinking about owning it. For it to be worth owning, the EUR/USD would have to rise above 1.30—that’s roughly 15% above where it currently trades.
Chart courtesy of www.StockCharts.com
But technical analysis isn’t the only reason why the EUR to USD pair’s fate is to the downside.
You have to pay attention to the European Central Bank (ECB) as well. As it stands, the central bank wants the euro to go down in value—you don’t want to get in its way. The ECB is doing all that it can to lower the euro. We know it’s already implementing a negative interest rate policy (NIRP) and printing money as well, but the worse part is that the ECB could still go even lower in its interest rates and could print even more euros.
Economic conditions aren’t helping the EUR to U.S. dollar exchange rate either.
Countries like Greece, Spain, Portugal, and Italy continue to struggle and sadly, we are seeing the powerhouses in the common currency regions facing headwinds, as well.
Consider Germany, for example. In February, industrial production in the biggest economy in the eurozone declined by 0.5% month-over-month. (Source: “Production in February 2016: –0.5% seasonally adjusted on the previous month,” Destatis, April 6, 2016.) Over the last year, industrial production in Germany has been subdued at the very best. Mind you, this is just one data point to provide some perspective. If you dig into the details, you will notice the German economy is derailing.
Look at France, as well. It’s the second-biggest economy in the eurozone. In January, the International Monetary Fund (IMF) expected France to grow by just 1.3% in 2016, lower than what it originally anticipated. (Source: “World Economic Outlook (WEO) Update,” International Monetary Fund, last accessed April 11, 2016.) Here’s the thing: we know that these estimates are usually revised lower, so I wouldn’t be surprised if by the end of the year, France grows by less than one percent.
EUR to USD Outlook for 2016
No matter how you look at it, there aren’t a lot of factors working in favor of the EUR to USD currency pair. It has gained slightly so far this year, but I am looking at it as nothing but a dead cat bounce.
As I have said in these pages before—and I keep the same stance—the EUR to USD could hit parity this year, which isn’t very far off from where the currency pair trades today. And 2016 could be the year when it happens, as all the signs are pointing towards EUR/USD parity.