Euro Moving Toward Parity with the US Dollar
While the most recent focus of forex traders has been the GBP/USD, many experts believe it is now appropriate to look at the EUR/USD. Fundamentally, the common currency of the Eurozone has been weak, driven by its very low inflation rate; nearly 0.5% year-over-year. After all, a currency cannot be strong for long when the inflation rate accompanying it is very low.
On top of the factors mentioned above, the European Central Bank (ECB) has continued its Quantitative Easing (QE) program. The unconventional monetary policy was built on the ECB purchasing securities from the market in order to lower interests rates and increase the money supply. The QE program is scheduled to end in March, but many investors and political thought leaders believe the Governor of the EBC, Mario Draghi, is likely to provide clues to an extending QE’s future.
Another problem is the upcoming vote in Italy regarding government reform. If a NO vote prevails, another bearish force is unleashed. However, if the government of Matteo Renzi should fall, it will create incentives for the Five Star Movement (an anti-establishment populist group) to push a referendum for Italy leaving the Eurozone.
So, let’s look at the big picture here in order to best prepare ourselves and our accounts for the most profitable trades possible. We have a set of bearish catalysts. In addition, we have a bullish wave in the USD pulling down the EUR/USD, but it is the fundamental bearish context that is really being reflected in the charts. Look at the monthly EUR/USD chart:
On the one month chart for EUR/USD, you can see bearish movements taking place. We had a brief moment of consolidation, that was finally broken on the 1.05 — the previous monthly resistance. Some great buying opportunities could be making their way to us soon enough.
While looking at this chart and deciding your own plan of action, remember a key principle of trading: the longer time frame governs the shorter time frame. For the time being, it seems like the EUR/USD is hovering around key monthly support. If it breaks down, as many traders are expecting, we should see strong psychological expectations for a test of parity with the USD.
The takeaway here is that the EUR/USD is weak both fundamentally, and technically and a savvy trader will be ready to take advantage on whichever way the wind blows it until it is strong enough to stand on its own. It should be an interesting ride!