The euro to dollar exchange rate seems to be making a strong comeback. Since the beginning of this year, the euro to U.S. dollar exchange rate has surged more than five percent. That’s an impressive move considering the EUR to USD is the most traded currency pair in the world.
The question now is this: is the trend here to stay?
Strong Resistance Ahead for EUR to USD Exchange Rate
No doubt, the euro has been going strong against the U.S. dollar since the end of last year. But going forward, it’s about to run into some serious resistance.
You see, since early 2015, the euro has been mostly trading below the $1.115 mark. On quite a few occasions, the EUR to USD exchange rate reached that resistance level, but very soon after, the pair dipped below it again. There was even one time that the EUR/USD broke above that level, though that surge was also short lived.
The recent climb in the EUR to USD has sent the pair to $1.138, which is quite close to the $1.115 resistance level. The strength of that resistance level has been tested multiple times, whether the EUR/USD can go above it remains to be seen.
Chart courtesy of www.StockCharts.com
Of course, technical analysis might be accurate in the short term, but it is by no means the full picture. To see where the EUR to USD exchange rate is headed to, we need to look at the fundamentals.
At first glance, it may seem that the worst could be over for the euro. Last month, Fed Chair Janet Yellen spoke at the Economic Club in New York in what could be considered a dovish tone. (Source: “The Outlook, Uncertainty, and Monetary Policy,” Board of Governors of the Federal Reserve System, March 29, 2016.)
Although quite a few Fed members have been calling for a rate hike, Yellen is not a fan of the idea. She said that the Federal Open Market Committee (FOMC) would “proceed cautiously in adjusting policy” and that caution “is especially warranted.” (Source: Ibid.)
So that should be good for the euro right? Not so quick. Although the Fed is not raising rates at the moment, the situation in Europe is much worse.
In the face of a struggling economy, the European Central Bank (ECB) has adopted extraordinary monetary policies, including negative interest rates. Last month, the ECB made another cut to all three of its main interest rates. In particular, the interest rate on its depository facility for commercial banks was lowered from -0.3% to -0.4%. (Source: “ECB Ramps up Stimulus But Disappoints Markets,” The Wall Street Journal, March 11, 2016.)
The reason behind it is simple: the ECB wants consumers and businesses to spend money instead of saving it. Hopefully, more spending and investment would get the economy going again.
However, there is a big hurdle: deflation. In March 2016, consumer prices in the eurozone actually declined 0.1% year-over-year, and that’s after a 0.2% year-over-year drop in February. (Source: “Euro Area Inflation Rate,” TradingEconomics.com, last accessed April 13, 2016.)
What does it mean for the eurozone economy? Well, deflation means prices are dropping. If consumers expect prices to be lower in the future, they might hold back on their current spending. Businesses might also hold on to their cash instead of buying new equipment, hoping that the same equipment would be cheaper in the future.
Therefore, it shouldn’t really come as a surprise that the eurozone economy has been growing at a much slower pace than the U.S. economy. And that’s another bearish point for the euro to U.S. dollar exchange rate.
The Bottom Line on the Euro to U.S. Dollar Exchange Rate
From both a fundamental view and a technical view, the outlook for the EUR to USD pair is terrible. As things unfold, a one-to-one euro to dollar exchange rate might not be that far away.