I want to dedicate this Sunday to analysing Eur-Usd in a wider way than the simple chart. Although, just the chart is my starting point. Since Mario Draghi started the Quantitative Easing program, 1,13500 has been a level, or rather, a very important resistance for the currency pair; as highlighted (black line) in the weekly chart.
For years, whenever Eur-Usd reached and momentarily exceeded 1,13500, that represented an excellent opportunity to open bearish positions. This was until Draghi announced the probable end of Quantitative Easing at the end of the year on July 20, 2017. As a consequence of this, in the following weeks, the currency pair breaks the resistance returning in area 1.25.
Here, for about three months, Eur-Usd has moved sideways, and then started a descent that brought it back below the famous level of 1.13500. The rest is history these days. The currency pair has repeatedly tried to return above 1,13500, but every attempt has been rejected so far.
A currency pair is the mirror of the two economies that make up it, therefore, let's see the current economic situation of the Eurozone and the United States. To do this, however, we have to start from Covid-19, the pandemic that has hit the whole world, causing, alas, many dead.
China was the first to be affected and also the first to return (almost) to normality. In fact, in 2020, it will be the only large economy that will have positive GDP growth (a source IFM). However, the role in stimulating for the rest of the global economy will be relatively limited and certainly not comparable to that played during the 2008 crisis.
The last, on the contrary, to be affected by the pandemic, and those who have underestimated the effects of the virus (for different reasons), will also be the last to return to normality. And in this, the Eurozone has an advantage compared to the United States (always if there is not a second wave in the autumn). The United States that are increasingly isolating themselves (last in order of time, the exit on July 6, 2021, from the WHO) and this will have economic repercussions.
So, if we compare the main macroeconomic data, we can see how in the United States the GDP is decreased at an annual rate of 4.8% in the first quarter of 2020 with an employment rate of 4.4% (currently 11.1%), while in the Eurozone the GDP is declined of 3.8% in the same period with an employment rate of 7.4% (currently still 7.4%).
At the end of July, the data relating to the second quarter will be released, and we will have a clearer idea of the impact of the Covid-19 on the two economies. However, as the Eurozone (and Europe in general) begins to return to normality (tourism has resumed in the summer, albeit with the exclusion of some countries including the United States), the USA continues to cope with the coronavirus emergency, with 50,000/60,000 new infected per day.
Under these conditions, I strongly doubt that the Eurozone GDP will be worse than the US at the end of 2020 (as forecasted by the IMF).
Going back to Eur-Usd, the currency pair should be well above 1.13500. Also in consideration of all the liquidity introduced on the markets by the Federal Reserve, greater than that of the ECB. However, it must be kept in mind that during this crisis, all correlations have vanished.
In particular, during the decline of the S&P 500, instead of seeing purchases of the classic safe-haven assets (gold, JPY, CHF), we saw strong purchases of USD. And to be totally uncorrelated are also the American stock indices from the economic reality of the country.
To all this, we have to add that we are in the summer, notoriously a period of low liquidity.
For years, whenever Eur-Usd reached and momentarily exceeded 1,13500, that represented an excellent opportunity to open bearish positions. This was until Draghi announced the probable end of Quantitative Easing at the end of the year on July 20, 2017. As a consequence of this, in the following weeks, the currency pair breaks the resistance returning in area 1.25.
Here, for about three months, Eur-Usd has moved sideways, and then started a descent that brought it back below the famous level of 1.13500. The rest is history these days. The currency pair has repeatedly tried to return above 1,13500, but every attempt has been rejected so far.
A currency pair is the mirror of the two economies that make up it, therefore, let's see the current economic situation of the Eurozone and the United States. To do this, however, we have to start from Covid-19, the pandemic that has hit the whole world, causing, alas, many dead.
China was the first to be affected and also the first to return (almost) to normality. In fact, in 2020, it will be the only large economy that will have positive GDP growth (a source IFM). However, the role in stimulating for the rest of the global economy will be relatively limited and certainly not comparable to that played during the 2008 crisis.
The last, on the contrary, to be affected by the pandemic, and those who have underestimated the effects of the virus (for different reasons), will also be the last to return to normality. And in this, the Eurozone has an advantage compared to the United States (always if there is not a second wave in the autumn). The United States that are increasingly isolating themselves (last in order of time, the exit on July 6, 2021, from the WHO) and this will have economic repercussions.
So, if we compare the main macroeconomic data, we can see how in the United States the GDP is decreased at an annual rate of 4.8% in the first quarter of 2020 with an employment rate of 4.4% (currently 11.1%), while in the Eurozone the GDP is declined of 3.8% in the same period with an employment rate of 7.4% (currently still 7.4%).
At the end of July, the data relating to the second quarter will be released, and we will have a clearer idea of the impact of the Covid-19 on the two economies. However, as the Eurozone (and Europe in general) begins to return to normality (tourism has resumed in the summer, albeit with the exclusion of some countries including the United States), the USA continues to cope with the coronavirus emergency, with 50,000/60,000 new infected per day.
Under these conditions, I strongly doubt that the Eurozone GDP will be worse than the US at the end of 2020 (as forecasted by the IMF).
Going back to Eur-Usd, the currency pair should be well above 1.13500. Also in consideration of all the liquidity introduced on the markets by the Federal Reserve, greater than that of the ECB. However, it must be kept in mind that during this crisis, all correlations have vanished.
In particular, during the decline of the S&P 500, instead of seeing purchases of the classic safe-haven assets (gold, JPY, CHF), we saw strong purchases of USD. And to be totally uncorrelated are also the American stock indices from the economic reality of the country.
To all this, we have to add that we are in the summer, notoriously a period of low liquidity.