EUR/USD is close to the bottom of the consolidation range 

Strong report on the US Non-Manufacturing PMI encouraged the EUR/USD bears to draw the rate below figure 13 bottom. The Purchasing Managers’ Index has been up from 56.7 to 59.7 in February, which delivered another blow to the seemingly coherent theory of deliberate weakening the USD rate. Its supporters believe that the USD uptrend can be reversed down by bad weather, fading fiscal stimulus effect, the revaluation, hindering the US export, and the Fed’s passivity. The euro fans believe a slowdown in the euro-area GDP growth in the second half year of 2018 to be temporary and bet on its recovery in 2019. The U.S. PMI, reported by ISM, has proved that the theory has flaws.

The greenback started rallying up after the release of the US GDP data in Q4, 2018. The US economy expanded by 2.6% Q-o-Q, which, compared to rather modest performance of the economies, issuing G10 currencies, has proven the US dollar appeal. Bears insist that it is about the past that has already been price in FX rates. Everything may turn upside down in the first quarter. It must be admitted that the increase in composite PMI in the euro area up to the three-month high of 51.9 and the recovery of the euro-area economic surprise index inspire the hope for the euro growth.

Dynamics of Economic activity in the euro area

Source: Bloomberg

Dynamics of economic surprise index

Source: Bloomberg

According to Bloomberg Economics, the euro-area growth rate has stopped sliding down; the decline won’t be so fast as it was in 2011. This allows the ECB not to panic at the upcoming meeting of the Governing Council.

Why is the EUR/USD sliding down then? I believe there are a few reasons. The first reason is unexpectedly strong Non-Manufacturing PMI data in the U.S. Second, it is the growth of the Treasuries yield. It is because investors worry about the national debt limit and a possible default, broadening of the budget up to $913 billion over the past 12 months, and about strong economic data. And, finally, it is the expectations of the ECB dovish rhetoric. The Euro is obviously being sold on the rumours about lower forecasts and the LTRO launch. However, if the European Central Bank is more concerned about the interest rate than about the economy state, the EUR/USD should be bought out on the facts already during Mario Draghi’s press conference.

According toFrançois Villeroy de Galhau, one of the candidates for the post of the ECB president, banks can’t charge negative interest rates, which weighs on their profit with “possible adverse consequences for the smooth transmission of monetary policy.” Credit Agricole expects that the Governing Council should raise the deposit rate up to zero in 2019 and reports about its fixation during at least 18 months. As for LTRO, according to the Spanish Banking Association, the financial establishments in Spain (the second biggest borrower after Spain) don’t need it.

The EUR/USD is close to the bottom of the range 1.125-1.15, in addition, a false breakout is rather likely.

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Price chart of EURUSD in real time mode

Euro is the victim of rumours

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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