The current lag in GDP growth and the increasing fragmentation of the political landscape are pushing the EURUSD pair toward parity. Following political turmoil in France, Germany may face a similar situation, which could severely hurt the euro. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Parity in the EURUSD may lead to fragmentation of the eurozone.
- February elections in Germany are a risk factor for the euro.
- The euro is weak due to crippling labor productivity in the EU.
- Short trades can be opened if the EURUSD pair falls below 1.048.
Weekly Euro Fundamental Forecast
The euro is demonstrating resilience in the face of the political crisis in France, where the government is on the verge of resigning. However, this factor, along with trade tariffs from Donald Trump, weakness in the eurozone economy, and aggressive rate cuts by the ECB, prompted 18 out of 42 Reuters experts to forecast the high probability of the EURUSD pair sliding to parity.
For the currency bloc’s export-oriented economy, the euro’s equal value against the US dollar is not as concerning as it is for policymakers. The EURUSD’s parity is likely to embolden those parties advocating their country’s exit from the eurozone. The right-wing party in Germany, represented by the Alternative for Germany (AfD) party, has already included this point in its election program in the fight for parliament in February. This development could prove harmful to the regional currency.
ECB officials have stated that Donald Trump’s protectionist policies will further exacerbate the challenges facing the eurozone economy. Their assessment is correct. If the White House did not prioritize the EU in 2018-2019, it is unlikely to do so now. During the initial trade war, the average tariff against China increased from 3% to 11%, while other countries saw an increase from 1% to 2%. This time, Trump is threatening with a 20% tariff.
Average US Tariffs
Source: Wall Street Journal.
Since the eurozone, Canada, and Mexico export their goods to the US, 10-25% tariffs would severely bruise their economies. While there is hope that Donald Trump is attempting to negotiate from a position of strength, it is unclear what his ultimate objective is.
US Import Trends and Structure
Source: Wall Street Journal.
The “America First” policy will enhance the US economy further. Notably, a robust policy on immigration should not impede overall progress. FOMC member Adriana Kugler asserts that migration and labor productivity have enabled the US to withstand the Fed’s most aggressive monetary restriction in 40 years. Should either of these factors cease to support the economy, the growing risks of accelerating inflation will force the central bank to pause in its rate-cutting cycle.
Indeed, labor productivity in the United States has increased by 30% since the 2008 crisis, which is three times the rate of growth in the eurozone. As anticipated, the IMF forecasts that US GDP will grow by 2.8% in 2024, while its European counterpart is expected to expand by 0.8%.
The divergence in economic growth and other factors has prompted Reuters experts to lower the EURUSD forecast for three months from 1.1 to 1.05 and for six months from 1.11 to 1.04. Most respondents do not anticipate parity, as they believe that many negative factors are already priced in the euro exchange rate.
Weekly EURUSD Trading Plan
I believe the outlook for the major currency pair lacks optimism. Political turbulence and the limping EU economy will likely impede the EURUSD pair’s recovery. Short positions can be opened if the pair drops below 1.048, adding them to the short trades opened on growth to 1.06.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. 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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