Skip to content

XTB TRADEBEAT

5 reasons why EURUSD is at the lowest point of 2018

Summary:

  • EURUSD dips below 1.18, the lowest this year
  • Diverging monetary policy and inflation among prime reasons for the decline
  • Italy added burden to the euro
  • Technical analysis sees a strong short term downtrend, the key support at 1.1550

The EURUSD reached a 2018 low of 1.1770 on Wednesday. We provide 5 reasons behind this decline, analyse the outlook and present technical analysis.

Diverging monetary policy

Major currencies often follow interest rates quite closely and this has been the case with EURUSD for years. 2017 was a major puzzle for FX investors as the widening bond spread in favour of the US dollar was met with depreciation. However, investors could not dismiss rising US market interest rates forever and we can see on the chart that this factor greatly contributed to a steep decline on the EURUSD.

link do file download link

EURUSD has been tumbling on the back of higher US market interest rates. Source: Bloomberg, XTB Research 

Inflation prospects

The CPI inflation in the US is nearly double of that in the EMU and this decouple may increase further in coming months. This has the market speculating that the Fed could increase rates 4 times this year while the ECB still purchases government bonds. Furthermore, while the EU recovered strongly last year, this recovery has stalled somewhat into 2018 and the US economy seems to be more resilient.  

link do file download link

US inflation is double of that in the EMU - a fine reason behind a lower EURUSD. Source: Macrobond, XTB Research

Rising oil prices

The OPEC policy, the Venezuelan crisis and now the break of Nuclear Deal with Iran – all these factors see the oil prices on the rise towards $80. Higher oil prices are literally fueling inflation and while this happens everywhere, investors think that the Fed is more likely to react as it’s in the midst of monetary tightening anyway while the ECB is widely expected to stay put until the end of this year.  

Italian concerns

Italy has been somewhat forgotten by the markets even though it has had no government for the past 10 weeks. Now the government could be in place, but the populist from the League and the M5S could very well revive the demons of the eurocrisis through their demands. They have already poured some cold water on the markets, suggesting a write-off of Italian bonds purchased by the ECB and relaxation of (already modest) fiscal discipline at home. Let’s recall that the Italian 10-year bond yielded more than 7% few years ago – a level that is clearly unsustainable for Italy – and shrunk to 2% only because of massive purchases by the ECB.  

Investors’ positioning

Speculative investors were historically net long on the euro and at the same time net short on the dollar at the beginning of this year, but now that the circumstances have changed this positioning might need to be adjusted.

What’s next?

While Italy is a serious long-term concern we do not expect it to have a massive short term impact. The real question is: could bond yields keep diverging between the US and Germany? We are not so sure. Yes, US inflation will be higher but these conditions will eventually bite into growth as well and the Fed may be reluctant to overdo the tightening. Secondly, recall that US bond yields looked far more attractive last year and yet the US dollar kept sliding because of the “Trump factor” (weak dollar talk, reform disappointments and various scandals). With the US dollar gaining on all the fronts it could be also a matter of time before we hear again from Trump (accusing Europe of “artificially weakening its currency”). Therefore we do not look at the current decline as an actual trend reversal.

Technical analysis

EURUSD, W1 – the pair cracked through the 50 and 75 week average placing an upwards trend at risk. What we see is a corrections that’s been already stronger than the one from late 2017 and has more momentum (5 bearish candles in a row). The key level to watch is 1.1550 that used to be a very strong resistance in the past and now could act as a vital support. The key resistance is at 1.20.

link do file download link

EURUSD, H1 – on a lower interval we see a very persistent downwards trend. It can be well encompassed by the moving average and we can see that the pair reacted a lot to the area between 75 and 150 LWMA and kept moving south. 

link do file download link

 

 

Disclaimer

This article is provided for general information purposes only. Any opinions, analyses, prices or other content is provided for educational purposes and does not constitute investment advice or a recommendation. Any research has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Any information provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it.

Past performance is not necessarily indicative of future results, and any person acting on this information does so entirely at their own risk, we do not accept liability for any loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.