Hello everyone, before we start this deep analysis of EURUSD let's see quickly a summary:
- EXPECTATION MEDIUM-LONG TERM: short
- EXPECTATION SHORT TERM: long
- ANALYSIS TOOLS: primarily macro trend (economical events), and trend analysis (using EMAs, RSI, trends, S&R), NEWS and forecasts (different sources)
- MAIN SOURCE USED: Economic data (from FED, ECB, EU, OECD), Investing.com, Bloomberg, Reuters, and the Economist.
This analysis begins with the most important event that happened in the last few days which is the FED hike of 0.75 basis points, putting the interest rate in the range between 2.25 and 2.50 %. A hike in interest rates is usually succeeded with capital inflows from foreign investors seeking higher returns. This leads to an increase in demand for USD, in turn appreciating the currency (a fall in USDEUR). Moreover, this hike in interest rate has been the steepest that FED has ever undertaken (according to an article published by the Economist). A big divergence between the interest rates of the FED and the rest of the world (especially the EU), creates a certain attractiveness for the USD. In fact, right now the FED rates are at 2.5% whereas the EU stands at 0.5% (according to data from FED, ECB and Investing.com). After the recent hike by the FED investors have gone bullish but got stuck in a range. This is only because of the uncertainty that the EU is facing. Moreover, anytime there has been a crisis or recession investors tend to move their funds to safe heaves such as the US. But this will be analysed better later. For now, the question that one could ask is: "Why the ECB won't raise its interest rates, thus appreciating the EUR ?". The answer is simple: RECESSION and ECONOMIC CRISIS. We will analyse this now.
The EU is a currency union that has its hand tight. The main reason is that the different economies present in the Union have rather large economic disparities (just compare for e.g. FR and DE with IT and ES). Now the difference between EUR interest rates and FED rates is around 200 basis points. A hike of 75 points is considered steep, so let's forget about 200. Moreover, a rise in interest rate is always connected with less economic activity (in simpler terms it is more expensive to borrow and spend, which reduces investments and spending). The European Union is already facing different crises (reduction in economic output such as DE), the war in Ukraine, the gas crisis, and the Italian government crisis. It has to take a more holistic approach when taking any decisions regarding rate hikes to avoid jeopardising the weak links in the union. A possible energy crunch (According to different articles in Bloomberg, and statements from Citigroup) would lead the entire EU into recession (thus pushing foreign capital to the American safe heaven). According to Bloomberg Germany is facing a serious issue, rationing (which could also push up social unrest). And being the key economy of the EU it would have a deep effect on the entire union. Italy has already retreated from benchmarking its gas prices with Amsterdam (Bloomberg). Germany’s biggest landlord already announced plans to reduce heating during the night (Bloomberg). Issues with the nuclear reactors in France are just worsening the whole situation. All of this will have a deep impact on inflation (forcing the ECB to hike rates, which would just bring the EU into recession). According to always to Bloomberg: "a survey of 3,500 companies by business lobby DIHK showed that 16% of industrial firms are considering reducing production or giving up certain operations because of the energy crisis". According to an article by Reuters: "Germany's manufacturing sector contracted in July for the first time in over two years, hurt by a deepening slump in new orders that darkens the outlook for Europe's largest economy, a survey showed on Monday".
All of this is just a small part of a very big analysis. In short, it can be said that the EU is facing a serious recession risk in the coming months. In fact, JPMorgan Chase and Rabobank see the EUR sliding to 95 cents given Europe’s current situation (with a chance of around 70% of this happening in the next months). Many sentiment indicators put the EURO between SELL and NEUTRAL and this is what we are going to analyse next.
According to a quick technical overview (daily chart), both 50 and 20 EMAs, are indicating a downward trend. The RSI (14, 2) has touched the 50 level mark (moving towards overbought). The price is facing a serious resistance between 1.036 and 1.026. Currently, the price is in a range between 1.026 and 1.014. The overall trend is downwards, and the price is finding it very difficult to break the resistance (as seen by the long wicks). Standard Bollinger Bands show a reducing momentum with the price touching the upper band. Using FIB RET (starting from the top of 27th June and the bottom of 14th July) right now the price is at the 50% mark (which is considered a rather strong level for the price to reverse). Moving on to the weekly chart it can be seen that the price has reached a rather strong weekly resistance (between 1.036 and 1.026) which was previously tested in '99 and '02, and the recent candles show a decrease in bullish momentum.
So using all of this information, we can deduct different things:
- The EUROZONE is facing different threats (gas, political crisis, war, inflation, economic disparities and unity). All are key initiators of a recession which would push the EUR down against the USD (since investors would prefer the stability of the US)
- Currently, the EURUSD is facing a critical resistance which was previously tested in '99 and '02. If it breaks this resistance the price would certainly have rather strong support (but only until the eurozone does not face any recession). This put me into the bullish zone on the smaller term (< daily mostly) as I expect the price to keep ranging.
- In the medium-long term I am certain that the price would drop to parity (or even below) due to the US being safe heaven, the economic crisis that the EU is facing and interest rates divergenceS (giving higher returns in the US compared to EU)
- A quick technical analysis shows a decreasing momentum and stiff resistance
This is all for now and hope you have liked this analysis. As I am someone that loves to learn new things I am open to any criticism and tips,, so please provide your feedback
Cheers and have a nice day.
- EXPECTATION MEDIUM-LONG TERM: short
- EXPECTATION SHORT TERM: long
- ANALYSIS TOOLS: primarily macro trend (economical events), and trend analysis (using EMAs, RSI, trends, S&R), NEWS and forecasts (different sources)
- MAIN SOURCE USED: Economic data (from FED, ECB, EU, OECD), Investing.com, Bloomberg, Reuters, and the Economist.
This analysis begins with the most important event that happened in the last few days which is the FED hike of 0.75 basis points, putting the interest rate in the range between 2.25 and 2.50 %. A hike in interest rates is usually succeeded with capital inflows from foreign investors seeking higher returns. This leads to an increase in demand for USD, in turn appreciating the currency (a fall in USDEUR). Moreover, this hike in interest rate has been the steepest that FED has ever undertaken (according to an article published by the Economist). A big divergence between the interest rates of the FED and the rest of the world (especially the EU), creates a certain attractiveness for the USD. In fact, right now the FED rates are at 2.5% whereas the EU stands at 0.5% (according to data from FED, ECB and Investing.com). After the recent hike by the FED investors have gone bullish but got stuck in a range. This is only because of the uncertainty that the EU is facing. Moreover, anytime there has been a crisis or recession investors tend to move their funds to safe heaves such as the US. But this will be analysed better later. For now, the question that one could ask is: "Why the ECB won't raise its interest rates, thus appreciating the EUR ?". The answer is simple: RECESSION and ECONOMIC CRISIS. We will analyse this now.
The EU is a currency union that has its hand tight. The main reason is that the different economies present in the Union have rather large economic disparities (just compare for e.g. FR and DE with IT and ES). Now the difference between EUR interest rates and FED rates is around 200 basis points. A hike of 75 points is considered steep, so let's forget about 200. Moreover, a rise in interest rate is always connected with less economic activity (in simpler terms it is more expensive to borrow and spend, which reduces investments and spending). The European Union is already facing different crises (reduction in economic output such as DE), the war in Ukraine, the gas crisis, and the Italian government crisis. It has to take a more holistic approach when taking any decisions regarding rate hikes to avoid jeopardising the weak links in the union. A possible energy crunch (According to different articles in Bloomberg, and statements from Citigroup) would lead the entire EU into recession (thus pushing foreign capital to the American safe heaven). According to Bloomberg Germany is facing a serious issue, rationing (which could also push up social unrest). And being the key economy of the EU it would have a deep effect on the entire union. Italy has already retreated from benchmarking its gas prices with Amsterdam (Bloomberg). Germany’s biggest landlord already announced plans to reduce heating during the night (Bloomberg). Issues with the nuclear reactors in France are just worsening the whole situation. All of this will have a deep impact on inflation (forcing the ECB to hike rates, which would just bring the EU into recession). According to always to Bloomberg: "a survey of 3,500 companies by business lobby DIHK showed that 16% of industrial firms are considering reducing production or giving up certain operations because of the energy crisis". According to an article by Reuters: "Germany's manufacturing sector contracted in July for the first time in over two years, hurt by a deepening slump in new orders that darkens the outlook for Europe's largest economy, a survey showed on Monday".
All of this is just a small part of a very big analysis. In short, it can be said that the EU is facing a serious recession risk in the coming months. In fact, JPMorgan Chase and Rabobank see the EUR sliding to 95 cents given Europe’s current situation (with a chance of around 70% of this happening in the next months). Many sentiment indicators put the EURO between SELL and NEUTRAL and this is what we are going to analyse next.
According to a quick technical overview (daily chart), both 50 and 20 EMAs, are indicating a downward trend. The RSI (14, 2) has touched the 50 level mark (moving towards overbought). The price is facing a serious resistance between 1.036 and 1.026. Currently, the price is in a range between 1.026 and 1.014. The overall trend is downwards, and the price is finding it very difficult to break the resistance (as seen by the long wicks). Standard Bollinger Bands show a reducing momentum with the price touching the upper band. Using FIB RET (starting from the top of 27th June and the bottom of 14th July) right now the price is at the 50% mark (which is considered a rather strong level for the price to reverse). Moving on to the weekly chart it can be seen that the price has reached a rather strong weekly resistance (between 1.036 and 1.026) which was previously tested in '99 and '02, and the recent candles show a decrease in bullish momentum.
So using all of this information, we can deduct different things:
- The EUROZONE is facing different threats (gas, political crisis, war, inflation, economic disparities and unity). All are key initiators of a recession which would push the EUR down against the USD (since investors would prefer the stability of the US)
- Currently, the EURUSD is facing a critical resistance which was previously tested in '99 and '02. If it breaks this resistance the price would certainly have rather strong support (but only until the eurozone does not face any recession). This put me into the bullish zone on the smaller term (< daily mostly) as I expect the price to keep ranging.
- In the medium-long term I am certain that the price would drop to parity (or even below) due to the US being safe heaven, the economic crisis that the EU is facing and interest rates divergenceS (giving higher returns in the US compared to EU)
- A quick technical analysis shows a decreasing momentum and stiff resistance
This is all for now and hope you have liked this analysis. As I am someone that loves to learn new things I am open to any criticism and tips,, so please provide your feedback
Cheers and have a nice day.