Is it time to be bullish on the EUR to USD exchange rate?
After the latest European Central Bank (ECB) meeting and in view of the likely forthcoming U.S. Federal Reserve rate hike, the euro can only expect to fall to further lows against the greenback. Parity itself is within sight as the EUR to USD exchange rate went as low as $1.10.
The euro has lost more momentum against the dollar as the ECB plans for further monetary easing. Apart from the depth of the euro’s drop, the speed with which it happened was even more revealing. Concerns that the Fed will raise interest rates will further affect euro-dollar exchange rate dynamics.
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If anything, the ECB’s revelation that its stimulus policies have not had any negative side effects within the eurozone only means that the prescription will not change. The euro remains weak and has been left to fall against the dollar.
There’s also more bad news for the euro…
Given that consumer confidence in Germany, the EU’s largest economy and biggest exporter, is rising and its unemployment rate is at historic lows, there is little chance that German Chancellor Angela Merkel will put pressure on the ECB to change course. The weak euro appears to be helping Germany more than the intended beneficiaries (Italy, France, Spain, or Greece). (Source: “German unemployment rate falls to record low,” BBC News, May 31, 2016.)
The only risk for a bullish dollar position against the euro is that the euro has some upside left. Indeed, the ECB, while reiterating its loose monetary stance, also said that the policy is working. That means the eurozone economy is improving. This leaves the possibility that today’s euro correction could reverse trend and suddenly shoot upward in a moment when the markets are not focused on interest rates in the United States.
Using growth in the eurozone as the excuse, the ECB could cite growth and the apparent lack of negative side effects from the quantitative easing to support the euro’s value. That is, the ECB might raise interest rates to match the U.S. Federal Reserve. Yet, the Organisation of Economic Co-operation and Development (OECD) has thrown in a good dose of reality masquerading as pessimism. The organization sees lower economic growth worldwide in 2016, even if it raised the eurozone’s growth slightly to 1.6% on June 1. (Source: “OECD Warns of Faltering Economic Growth, Cuts Forecasts,” The Wall Street Journal, June 1, 2016.)
While nobody has calculated the chances of the EUR to USD exchange rate moving back in favor of the euro, the ECB made this possibility even harder. The ECB says the eurozone is not out of the proverbial woods yet and threats to its economy remain. For starters, the British referendum over its European Union (EU) membership, the so-called Brexit, carries many unknown risks for both the British and European economies.
In the end, the only thing that could affect the dollar’s rally against the euro is short-term profit-taking. The favorable U.S. jobs data has increased the odds that the Fed will vote to raise interest rates ever so slightly at its meeting this month. (Source: “Dollar Exchange Rates Today: USD Steady Vs Pound Sterling, Euro Ahead Of Today’s NFP,” Exchange Rates, June 1, 2016.)