While the most recent focus of forex traders has been the GBP/USD, it’s now appropriate to look at the EUR/USD. Fundamentally, the common currency of the Eurozone has been weak, driven by its very low inflation rate (near 0.5% year-over-year). A currency cannot be strong for long when the inflation rate accompanying it is very low.
On top of that, the European Central Bank (ECB) has continued its Quantitative Easing (QE) program. It’s scheduled to end in March, but the Governor of the EBC, Mario Draghi, is likely to provide clues to QE’s future.
Another problem is the upcoming vote in Italy regarding government reform. If a NO vote prevails, another bearish force is unleashed. However, if the government of Matteo Renzi should fall, it will create incentives for the Five Star Movement (an anti-establishment populist group) to push a referendum for Italy leaving the Eurozone.
So, we have a set of bearish catalysts. In addition, we have a Bullish wave in the USD, pulling down the EUR/USD.
The fundamental bearish context is also being reflected in the charts. Look at the monthly EUR/USD chart:
A key principle of trading is that the longer time frame governs the shorter time frame. In the case of the EUR/USD, the pair is hovering around key monthly support. If it breaks down, we can see strong psychological expectations for a test of parity with the USD.
The take-away here is that the EUR/USD is weak both fundamentally, and technically. It should be an interesting ride!