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EUR/USD: Euro sinks to more than 2-year low on divergent data

H.S. Borji
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EUR/USD: Euro sinks to more than 2-year low on divergent data

The euro declined against its US counterpart Wednesday on divergent data releases from the Eurozone and United States, as the markets shifted their attention to the European Central Bank.

The EURUSD fell below 1.25 in the European session, bottoming out at 1.2459, its lowest level in over two years. The pair would subsequently consolidate at 1.2482, declining 0.56 percent. The EURUSD is likely to find support at 1.2436 and resistance at 1.2589.

The US dollar continued to rally Wednesday, soaring to a fresh seven-year high against a basket of currencies after the Republican Party secured a majority in the US Senate. The US dollar index, a weighted average of the greenback against the euro, yen, pound, loonie, franc and krona, surged 0.46 percent to 87.39.

The dollar index has gained 1.4 percent since Monday as the greenback continues to assert its dominance. On Wednesday the dollar was supported by solid jobs data, as payrolls processor ADP said private employers added 230,000 jobs in October.

In Eurozone data, retail sales declined in September, deepening concerns about the health of the 18-nation currency bloc.

Eurozone retail sales plunged 1.3 percent in September, following a gain of 0.9 percent a month earlier, the European Commission reported today. That was the biggest single month drop since April 2012. The decline was much bigger than the 0.8 percent drop forecast by economists.

In annualized terms, retail sales grew just 0.6 percent in September, down from 1.9 percent in August.

Declining retail sales is a symptom of a much larger problem plaguing the Eurozone, as it points to a further deceleration in consumer demand. This could have devastating consequences for inflation, which is trending below 1 percent and falling.

Separately, the Eurozone service economy was little changed in October, as weak demand weighed on growth.

Markit Group’s final gauge of Eurozone service activity was 52.3 in October, little changed from the September reading.

The composite index, which measures business activity in the services and manufacturing sectors, was 52.1, little changed from September’s ten-month low. Eurozone businesses reported job losses for the first time since November 2013, as weaker new business growth weighed on hiring plans.

The October data make “for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life,” said Markit chief economist Chris Williamson in a statement.

Williamson estimates the Eurozone economy grew just 0.2 percent in the third quarter. The currency region stagnated in the second quarter as Germany contracted and Italy slipped back into recession.

The European Central Bank, which is scheduled to meet on Thursday, is struggling to curb deflation in the Eurozone. The central bank has slashed interest rates to an all-time low of 0.05 percent and announced additional stimulus measures, including purchasing asset-backed securities, in order to promote recovery in the fragile currency region. These measures have yet to boost inflation, which edged up to 0.4 percent in October. That was the thirteenth consecutive month Eurozone inflation has been at less than half of the ECB’s target of 2 percent.

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