Is the Euro to Dollar Exchange Rate Doomed?
The EUR to USD exchange rate is in a correction.
Over the past few days, the euro to dollar exchange rate has shifted in value, ranging between $1.1275 and $1.1270. The dollar has come under pressure and any effort to break away from the $1.1465 mark faces heavy resistance. However, given that this was a correction, the EUR/USD could fall below $1.1270, at which point, it could exacerbate the euro’s downtrend and push the pair closer to parity.
Indeed, a bullish streak on Wall Street (thanks to a return of risk appetite generated by good Chinese import-export data) prompted an improvement in market sentiment. This has favored a reduction in short positions against the dollar, allowing the U.S. currency to achieve its most consistent daily upward growth for more than a month.
On Thursday, the EUR to USD pair continued to reverse the euro’s gains, moving closer to its recent lows with palpable downward pressure.
It may be a good time to short the euro. The European consumer price index (CPI) appears below expectations, weakening the currency. And if the U.S. CPI manages to stay the same—or even improves—it would strengthen the dollar further in the EUR/USD pair, pushing closer to parity.
Given these premises and the increase buoyancy in U.S. markets on Wednesday, the EUR/USD pair should have dropped further than $1.12. The obstacle toward parity is that U.S. retail sales data for March turned out to be lower than expected, putting some bearish pressure on an otherwise highly bullish scenario for the U.S. dollar. Also in favor of the dollar is the fact that inflation in the eurozone remains too low for the European Central Bank’s (ECB) comfort.
In the medium and long term, the U.S. has bullish momentum. A few weeks ago, the president of the Philadelphia Federal Reserve, Patrick Harker, suggested that should the U.S. economy continue to recover, the Fed should lift interest rates before the end of April. Harker suggests the Fed will raise rates there more times this year, though the consensus expects two hikes. (Source: “Philadelphia Fed Chief Harker Calls for 3 Rate Hikes This Year,” Reuters, March 23, 2016.) This would put more distance between the dollar and the euro, given the ECB’s focus on expansionary monetary policy. Inflation in the eurozone will not suddenly reverse course.
Meanwhile, there is also the question of Europe’s reluctant sanctions against Russia, which have cut off an important market from European exporters. And unemployment in the eurozone remains high, even if there are signs of an economic recovery and higher auto sales. Ultimately, while European retail sales were better than expected, growth in the eurozone has remained flat, which leaves the euro vulnerable.
If the EUR/USD pair remains at the $1.12–$1.13 level, it’s because growth in the United States was somewhat lower than expected given the data issued Wednesday. U.S. inflation and the CPI also dropped or stayed flat, such that the differential in the EUR/USD pair was not enough to generate strong shifts in one direction or the other.