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How Low Can The Euro Go?

Published 11/03/2015, 08:40
Updated 03/08/2021, 16:15
EUR/USD
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UK100
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Few people would have imagined in May last year when EURUSD was trading just shy of 1.4000 that nearly 10 months later the currency would have slid nearly 35% to be trading just short of 1.0700 with the potential to go even lower.

A good part of this move lower has occurred in the past three months sliding from 1.2480 at the beginning of December, as currency markets bet on the fact that the European Central Bank would finally pull the trigger on a large scale easing (QE) program.

Six years to the day from when the Federal Reserve started its bond buying program in 2009 the ECB finally pulled the trigger on its highly flagged stimulus program, putting aside the legal niceties that buying bonds with a negative yield surely has to be construed as monetary financing.

The weakness in the euro has been compounded by the fact that the US economy shows continued signs of an improvement, with the possibility that after last week's stellar jobs numbers, that next week's FOMC meeting could well see the removal of the word "patience" from the Fed's statement with respect to the timing of a rate hike.

This would be important given that markets have inferred from previous comments made by Fed Chair Janet Yellen that the removal of the language of patience could suggest the prospect of a rate hike within the timeframe of the next two meetings.

It is important to note however she was less than emphatic about this at her recent Humphrey Hawkins testimony to Congress, which suggests markets could be heading for a disappointment next week if the language stays in, particularly given the weakness in inflationary pressures.

There is also the added complication of the damage a rising dollar is doing to sentiment surrounding the US stock market and the FTSE100 right now as both markets continue to drop sharply, and this might stay the Fed's hand.

For now the euro looks to be headed towards parity, and when looking at the chart below it's not hard to see why.

Chart: US - German 10 year spread

We are already well above the previous peaks in respect to the spread difference between US 10 yields and German bund yields which was saw in the late 1990's and the mid 2000's, which would seem to suggest that on yields alone there appears to be more downside than upside on this particular trade.

The previous all-time low in EURUSD currently sits all the way down at 0.8230 which was back in October 2000, when yields were much closer together than they are now.

EURUSD: Weekly Chart

Obviously yields aren't everything and the gap could well narrow from where we are now at 188 basis points, but the direction of travel remains important and in that context it remains highly likely that the European yield curve would well flatten further, particularly given that shorter term rates are already negative.

The next target sits at 1.0500 the March 2003 lows and it remains a very short hop from there to parity.

The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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