EUR/USD to lowest level in 17 months

Comment by Bart Hordijk, Monex Europe

Brexit, Italy, slower growth and a cautious European Central Bank are the four apocalyptic horsemen currently chasing the euro to its doom, or well, at least to a 17-month low against the dollar. The levels we see now are coincidentally the same we saw around June 2017, just before euro embarked on a massive rally against dollar on the back of the highest yearly growth in a decade and increased hopes of an imminent ECB normalization of monetary policy. The fact that the pace of growth has slowed down, and surveys aren’t especially drunk on optimism either, put a lid on the prospects for the euro. The anemic core inflation is then enough for the ECB to firmly hammer this lid shut as the expectation of their first rate hike moves further and further back towards the end of 2019.

After these blows, politics bring headwinds to the Eurozone as well, with both Italy and the Brexit bringing uncertainty and division within the bloc from two different fronts. The situation in Italy slows down much needed European Union reforms, which for example would improve risk sharing across the bloc, while the accelerating deficit growth bring a direct risk to the sustainability of the debt of the Europe’s fourth largest economy. That odds are increasing Europe’s second biggest economy may fall out of the trading bloc in a chaotic manner then add another worry to Europe’s already substantial pile of concerns

Looking forward the breaking of 1.13 on EURUSD brings us into a new trading range that potentially stretches all the way up to 1.10. Signs are certainly dire for the euro and a drastic change of monetary policy signaling, the Italian budget stance, macroeconomic prospects, or Brexit is what the currency needs now to turn this momentum around. Of these factors, building inflation pressures confirming the ECB’s confidence in its policy path, or a sudden Brexit deal seem most likely. The fact the euro needs to put it hopes on these fickle factors to get it out of the woods, shows these apocalyptic horsemen are still keenly circling the single currency.

Chart 1: Back to square one: EURUSD is exactly where it traded before its impressive rally in the second half of 2017.

Eurodollarkoers