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Euro Poised to Test Lower Levels

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Euro Poised to Test Lower Levels

Ahead of Thursday ECB meeting the EURUSD continues to trade sideways as investors ponder whether the central bank will ease monetary policy and potential increase the amount of stimulus that is available within the region. Recent data points have been mixed but the outlook for economic growth is soft which likely requires ECB action.

The European Commission has lowered its 2014 euro-zone GDP forecast to 1.1% from a prediction in May of 1.2%, while it expects unemployment to remain high at 12.2% and inflation to remain low at 1.5%. The EC also estimates that the euro-zone’s economy will shrink 0.4% this year following a decline of 0.7% in 2012. The EC projects that Germany, Belgium, Estonia and Ireland will gain momentum in 2014, although it warned that Spain, Greece, Italy and Portugal will experience much weaker growth.

Yield differentials in the 2-year and 10-year space have moved in favor of the greenback which has put pressure on the EURUSD currency pair. With a weak economic outlook there is likely to be a strong push from the ECB to generate the appropriate stimulus needed to generate above trend in European economic growth.

The EURUSD remained unchanged and is poised to break through the current upward sloping trend line on any dovish comments from the ECB. Momentum on the currency pair is negative with the MACD (moving average convergence divergence) index printing at its lowest level since July. The MACD generated a sell signal in early November as the spread (the 12-day moving average minus the 26-day moving average) crossed below the 9-day moving average of the spread. The RSI tumbled to 40 which is the lower end of the neutral range.

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