We have been bearish on the euro since October and it's made a major move to the downside but there is more downside to come in our view and we expect a move to 0.9500.
The Economy & Interest Rates
The economy is weak and heading for a recession in our view which will mean the ECB will slash rates to try and ignite economic growth. We expect the ECB to cut rates far quicker than the Fed which may have to raise rates in response to Trump's proposed pro-growth policies.
The growth engine of Europe (Germany) is "dead". Brooks: "IFO has fallen to levels that prevailed during the global financial crisis. Only that 2008 saw a quick rebound, while there's no end in sight for the current economic malaise. The best antidote to stagnation is a weaker Euro, which requires the ECB to cut aggressively..."
In terms of forward indicators, PMIs from the zone are terrible to find eurozone and euro members go to the bottom of the page! – A comparison with other economies on the chart below. A reading below 50 means contraction.
GDP forecasts US V Europe on the chart below - We think the growth rates are optimistic in terms of the euro and pessimistic in terms of US growth.
There is of course the potential for tariffs which will provide a further hit on growth at present these are not factored into growth forecasts. Chart from Goldman shows full implementation v their less severe baseline but either has the potential to send the economy into recession.
Has the Market Discounted Trade Tariffs?
Vasileios Gkionakis, Senior Economist & Strategist at Aviva Investors noted that "Only some – and likely much less than you imagine – policy-risk premium is embedded in [the] dollar’s value so far." His analysis, suggests that fundamental factors like economic data and interest rate differentials account for 50% to 90% of the recent USD appreciation. This leaves only 1% to 1.5% attributable to non-fundamental factors, including potential trade war risks. Gkionakis believes that this leaves "plenty of USD upside to manifest" if the US implements protectionist trade policies.
EU inflation
The ECB will cut rates aggressively to help the zone and the fact inflation is slowing will allow them to do so.
Gas Prices
Gas prices remain elevated by historical standards, the market is not looking for higher prices but a cold snap with lower-than-average storage levels could spike prices. A break above the key 50.00 level would weigh on the euro.
Russia Ukraine War
Could Europe be drawn directly into the Russia - Ukraine war? We think its unlikely but tensions are high between Russia and NATO - If there is a significant escalation the euro would be hit hard.
Political Problems
This is from our previous article and still remains valid - 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.
Final Words
We think the market is too optimistic about the zone avoiding recession, the potential for significant tariffs, energy prices spiking and also geo political concerns.
Technical Analysis
Note if you want to see our daily analysis in terms of exact entry, stop, and targets in EUR/USD and 14 other pairs You can Subscribe Here Below see the key levels in terms of shorting the euro in terms of both daily and monthly charts.