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Fundamentals Point to Heavier Losses for EUR/USD

H.S. Borji
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Fundamentals Point to Heavier Losses for EUR/USD

The euro advanced more than 0.3 percent against the US dollar last Friday, trimming its weekly losses to around 0.1 percent, but analysts note the common currency risks greater downside this year.

The EURUSD is forecast to fall to 1.31 this year, according to analysts at Morgan Stanley, as the fundamentals show increasing divergence between the United States and Eurozone.

On Monday the EURUSD was back on its heels, trading at intraday lows amid a dearth of economic data. The pair declined 0.18 percent to 1.3383. Daily support is likely found at 1.3357 and resistance at 1.3447, just below the 20-day exponential moving average.

The pair is trading around 300 pips below its long-run averages, as a broad-based US dollar rally extends for a second month.

The economic calendar has been largely to blame for the euro’s weakness, as the combined forces of disappointing Eurozone data and a faster US recovery have sent the EURUSD to a more than nine-month low.

The European Central Bank left monetary policy unchanged last week, despite consumer inflation plunging to a nearly five-year low last month. Eurozone consumer prices advanced just 0.4 percent in the 12 months through July, according to initial estimates.

The European Commission is expected to confirm the 0.4 percent growth rate on Thursday when it posts revised figures.

German inflation eased to 0.8 percent in July, after hitting a 1 percent annual pace the previous month. The Federal Statistics Office will post revised CPI data on Wednesday.

The perfect storm is brewing for the EUR/USD. Adding to the threat of deflation is growing conflict between Russia and the West over Ukraine. The United States and its European allies have levied sanctions against the Russian Federation for its perceived escalation of the Crimea conflict. Russia countered those measures last week by announcing fresh import bans against Western food products.

At the same time, German economic sentiment is at 19-month lows, as investors brace for a slowdown in the German growth engine. The German economy is forecast to have registered zero growth in the second quarter, as the Ukraine crisis weighed on economic activity.

The German economy expanded 0.8 percent in the first quarter.

The German government will post second quarter GDP figures on Thursday.
By contrast, the French economy is expected to have rebounded slightly in the second quarter, with economists forecasting a gain of 0.1 percent between April and June.

Eurozone GDP growth is forecast to have slowed to 0.1 percent in the second quarter, down from 0.2 percent in the first three months of the year. Year-on-year, second quarter growth is forecast at 0.7 percent.

By contrast, the US economy grew at an annualized rate of 4 percent in the second quarter, more than offsetting the first quarter’s weather-related contraction.

In other trading, the euro weakened against the British pound, as the EURGBP tumbled 0.24 percent to 0.7975. The pair faces initial support at 0.7952 and resistance at 0.8018.

The euro weakened against the Japanese yen, as the EURJPY tumbled 0.08 percent to 136.71. The pair faces initial support at 136.06 and resistance at 137.29.

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