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EUR/USD weakens as further Eurozone slowdown expected

H.S. Borji
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EUR/USD weakens as further Eurozone slowdown expected

The euro softened against the US dollar on Tuesday, as the economic outlook on the Eurozone continued to deteriorate, according to the latest survey of euro area investor sentiment.

The EURUSD fell below 1.27, erasing Monday’s strong performance that was triggered by bearish comments from Federal Reserve officials over the weekend. The pair declined 0.6 percent to 1.2676. Initial support is likely found at 1.2661, according to the daily classic pivot point chart. Resistance is ascending from 1.2802.

The euro’s broad reversal was triggered in part by another sharp decline in Eurozone investor confidence. Financial market experts lowered their outlook on Germany, Europe’s largest economy, for the tenth consecutive month, as the economic sentiment index fell into negative territory for the first time since November 2012.

Germany’s economic sentiment indicator plunged 10.5 points to -3.6 in October, the Centre for European Economic Research (ZEW) reported today. Economists forecast a drop to 1 in October.

The economic sentiment indicator now stands 28.1 points below its long-term average of 24.5.

The assessment of the current situation deteriorated further in September, falling to 3.2 from 25.4. Economists forecast a decline to 18.

“ZEW’s financial market experts expect the economic situation in Germany to decline further over the medium term,” said ZEW president Clemens Fuest. “Geopolitical tensions and the weak economic development in some parts of the Eurozone, which is falling short of previous expectations, are a source of persistent uncertainty. These factors are tarnishing growth expectations in Germany. Disappointing figures concerning incoming orders, industrial production, and foreign trade have likely contributed to the growing pessimism among financial market experts.”

ZEW’s economic sentiment indicator for the Eurozone fell 10.1 points in October to 4.1. The current assessment indicator fell 13 points to -56.8.

The Eurozone economy is forecast to expand just 0.8 percent this year, according to a revised outlook from the International Monetary Fund. Growth is expected to reach just 1.3 percent in 2015. Germany’s economy is forecast to grow 1.4 percent this year and 1.5 percent in 2015.

Germany contracted in the second quarter of this year, as the broader euro area stagnated.

The fragile state of the Eurozone economy is forcing the European Central Bank to act quickly to combat slow growth and deflation. The ECB on Tuesday defended its controversial bond buying program at the European Union’s highest court, claiming it was essential to maintaining the 18-nation currency bloc. The program, which was initiated after ECB President Mario Draghi pledged to do “whatever it takes” to save the fledgling euro, is being examined by a 15-judge panel after Germany’s top court questioned its legality earlier this year.

The ECB slashed interest rates to 0.05 percent in September and announced plans to begin purchasing asset-backed securities in an attempt to stimulate lending in the Eurozone. The program is expected to expand the central bank’s balance sheet back up to €1 trillion, levels not seen since early 2012. The ECB will begin purchasing covered bonds in the middle of October and asset-backed securities in the final quarter of 2014.

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