The big picture for the EUR

If you trade a currency, you need to know the fundamental factors that lie behind its value. Do you trade the euro? Let’s see how the situation changed since the last time we studied the factors which influence the euro’s exchange rate and make our forecast for what comes next.   

Negative factors for the EUR

• The slowdown in economic growth. The data released last week showed that the euro area’s economic growth slowed down from 0.4% to 0.2% q/q in Q3. The annualized economic growth was down from 2.2% to 1.7%. The region’s manufacturing and services PMI disappointed in October. As a result, the economic weakness may continue in the final months of 2018. The EU will update economic forecasts on Thursday, Nov. 8.
• Potential actions of the ECB. The economic slowdown won’t go well with the ECB. Moreover, the stress tests results of the European banks released recently were worrisome. There’s talk that the European Central Bank may restart a form of policy easing called TRTLOs (Targeted Long-Term Refinancing Operations). In simple terms, the ECB may once again cheap loans to the euro zone’s banks. If it happens, the euro will decline.
• Italian question. On Monday, Nov. 5, the euro area’s finance ministers called on Italy to revise its planned 2019 budget within a week. The European Commission had earlier rejected Italy’s populist budget. If the nation’s new budget plan is not accepted by the EU, investors’ fear will strengthen and the euro will be hurt.    

Positive factors for the EUR

• Rising inflation. Economically inflation is what may actually save the euro and let it turn up. According to the preliminary data, European CPI growth accelerated in October. The final release will be on Nov. 16. A confirmation of the stronger inflation figures will help the euro.
• German politics. German Chancellor Angela Merkel announced last week that she will quit as head of the Christian Democratic Union party and won’t run for another term as chancellor when her current term finishes in 2021. Her potential successors will campaign ahead of the party’s convent in December. A change in German leadership may give new hopes and strengths to the euro, especially if the pro-integration Friedrich Merz becomes the new head of the CDU.

We will see in the upcoming weeks how the things develop. The factors mentioned above will be the main drivers of the euro.

The short-term story

EUR/USD. The near-term picture of the EUR/USD is influenced by the news from the United States, where Democrats managed to take over the House of Representatives after the Midterm elections. The USD broadly weakened, and the euro took advantage of that. Until the market digests this information and returns to trading on the upcoming Federal Reserve’s rate hikes, the euro has a chance to regain some upside. The recovery may take us to 1.15, 1.1560 and 1.1620 (Fibonacci levels). The Fed will release a new monetary policy statement at 21:00 MT time on Thursday, and this may remind the market why the USD was going up in the previous weeks.   

EUR/GBP. The market is cheering for the British pound as there seems to be an agreement between Britain and the EU. The medium-term prospects of the GBP are not clear yet as the deal may not pass through the British parliament, but in the short-term, the pound may gain more thus pulling EUR/GBP lower. The week started with a gap down after a bearish gap. These are the signs that the downtrend will continue. Below 0.87 the pair will target 0.8640 and 0.8525.

Author: FBS Analyst Team

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