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For several months we have been trading EUR/USD short and we have seen significant downside but there is far more to come in our view and we see EUR/USD trading down to the 0.9500 level in the coming months...

Our view of the fundamentals, sentiment and technical levels to watch are outlined below.

This article is a follow-up to our article written back in mid-November which outlined the big fundamentals that are driving the euro which have now worsened:  Click Here to View

Economic Decline - Going from Bad to Worse

The major problem for the zone is the decline of Germany which we covered in depth in our previous article. Following five years of stagnation, Germany’s economy is now 5% smaller than it would have been if the pre-pandemic growth trend had been maintained. The government collapsed recently, and without strong political leadership, the problems in the zone will only worsen. Germany is heading for a historic economic and political collapse. “The timing is terrible for the E.U. — basically, these multiple crises are hitting the E.U. at the worst possible time, because the bloc’s traditional engine is busy with itself,” Jana Puglierin, of the European Council on Foreign Relations, said, referring to Germany and France. In terms of France again we have political paralysis. 

With both the zones largest economies in political turmoil, there will be no fiscal policies to help the zone and it will have to rely on the ECB to help by cutting rates aggressively. The economy in the eurozone is in big trouble and in the New Year we could well see a recession which means the ECB will cut rates faster than the Fed - the majority of economists don't see a recession coming and remain to upbeat on the zones outlook. The problems in the eurozone can clearly be seen in the charts below.

Looking back the zone barely grew this year and we expect it to hit a recession in 2025.

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PMI's which are a leading indicator are pointing to lower growth ahead and below the ECB's projections.

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One of the major problems for the EU is that Natural Gas prices are elevated and unlikely to come down soon - In fact risks are to the upside. High Natural Gas prices are hitting industry and export volumes.

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We remain very bearish on the euro and we see no big upside into the start of the Trump presidency as the threat of tariffs from Trump will cap any upside.

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Energy prices are one of the causes of the slow growth in the eurozone but it could be about to get worse - A  scenario not many are seeing which should not be dismissed according to Mizuho:

"Russia's Gas Role: Russia still supplies 20% of EU gas imports, the third largest supplier after Norway and the US. Supply cuts and tight energy markets have increased European gas prices and depleted storage levels.

Pipeline Contract Expiry: The Russia-Ukraine gas pipeline contract, vital for Eastern Europe, expires in January 2025 and is unlikely to be renewed, with the potential for Azerbaijan to take over.

Economic Risks: A harsh winter could trigger stagflation in Europe, with rising inflation, EUR below parity, and increased government debt issuance to manage the economic strain." (Mizuho)

Interest Rate Outlook

In terms of interest rates they favor the US now and going forward we could see the gap widen. At present rates in the US stand at 4.25% with rates at 3.15% in the eurozone so the yield advantage is with the US and this will widen - Trump is expected to lower taxes and stimulate economic growth at a time when inflation is elevated which will prevent the Fed cutting interest rates. On the other hand, the ECB has to contend with a weaker economy and no fiscal stimulus from Governments as growth remains barely in expansion territory so they will cut rates. In terms of inflation, it is easing back in the zone allowing the ECB to cut.

While service price inflation remains elevated at 3.9% y/y in November given that its weight in the overall HICP index is almost 45%, however, momentum has fallen significantly and the seasonally-adjusted monthly rate of change was negative in the last print.

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A Big Trend Focusing on Percentages the Key to Big Profits 

Since we focused on this trade and went short into the 1.1100 level we have moved towards 1.0400 which is a 6.3% return without ANY leverage - we now expect a move down to 0.9500 which if we get to the level would be an additional 8.65% so a great return with no leverage and using sensible leverage of 2 or 3 to 1 it would be a great return - Big fundamentals drive big trends and focusing on them and trading longer term can yield great returns. Check out our Members Center for more details Click Here to View

Technical Analysis

In terms of the key levels of support and resistance to look at they are outlined on the monthly and daily charts below. Also if you want to see our exact levels of entry stop and target on a daily basis in EUR/USD and 14 other pairs join our Members Centre Click Here to View 

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