Growth in the Eurozone has slumped and businesses are already feeling a pinch. While European banks prepare to tighten their belts, foreign exchange (forex) traders may well be cheerfully rubbing their hands together. Why? When currencies devalue, banks worry, but forex traders can profit from a fall by making a “sell” order. The question is, should traders sell EURUSD?
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The outlook does not look promising. Skipping the boring statistics, much will depend on November’s figures, since the first two month’s PMIs in a quarter are all that is required to accurately forecast the quarterly GDP growth rate. Some of these fears are overwrought and unlikely to materialize but can throw a spanner in the works of even the best indicators. The fall in the Euro from its 1.25 heights in 2017 to its most recent lows in the 1.12s has reflected the worsening data, but is it strong enough to trigger a market order for this week?
Several factors have been blamed for the decline. One is the dwindling influence of ECB monetary easing, which some argue had its peak influence in 2017 and was a major reason for the rise in growth in that year. Another reason given is a fall in Eurozone exports and the trade surplus, because of the strong Euro (at the start of the year).
It is difficult to assess whether ECB monetary easing is waning, but it is true that borrowing costs have risen compared to 2017 which can’t have helped growth and may be a factor. As far as the slowdown in trade goes, it may in fact just be a temporary factor. European exports have actually maintained a relatively stable upward trend. The reason the surplus has shrunk more is that imports have risen faster than exports.
Germany is one of the largest importers of oil and gas from Russia and the rise in oil prices during 2018 could explain why growth figures out of Germany have been so lacklustre. The negative effect on the trade balance from high oil prices is likely to reduce in Q4. Crude oil appears to have now entered a bear market. The price of oil peaked in June and September but since then has dropped.
There are other factors which are positive for the outlook. Wage rises are now in the middle of their long-term range between -0.8% and 3.4%, If they can reach 2.5%, it will mark a turning point for the ECB. Higher wages drive up inflation which then puts pressure on the ECB to raise interest rates. Higher interest rates appreciate the euro because they increase net capital inflows. Currently, core inflation in the Euro-area remains too low to expect the ECB to raise interest rates any time soon, but not so low as to suggest they may not raise them on their target date after the summer of 2019.
The US Federal Reserve didn’t start raising interest rates until core inflation in the US was consistently in the 1.75% -2.00% range. We assume something similar will be true for the Eurozone. This seems, more or less, in line with the ECB’s current forecasts, assuming wages and inflation continue rising at their current rate.
The situation in Italy and the UK remain as key risk factors and could still supply some sharp short-term volatility as the stand-off continues. The next downside target is at 1.1210, followed by 1.1000. Further downside below that, however, may become increasingly problematic, given the underlying economic positives mentioned above, particularly in the Eurozone labour market and wages, as well as because of the current bearish trajectory of oil.
Trading on any volatile asset can be troublesome. Those traders riding the forex storm must keep a strict eye on price movement hour by hour, and often prefer short-term orders with tight take profit and stop loss settings. FX News recommends caution for now. Keep an eye on the Exness economic calendar to be ready for coming news releases that have importance on market price shifts. Until then, USD, JPY, and CHF are perhaps the more stable currencies to look at for the 2018 Q4. When breaking news hits the markets, the movement is fast and only the early bird gets the worm.
Be prepared for the next price breakout