28 August 2014

Is EURUSD set for a roller coaster ride?

Recent concerns over Europe's chronic unemployment problem have been driving the euro lower this week. Are we witnessing a one-off decline in EURUSD or a new trend?
  • ​​​​​Draghi’s unemployment concerns driving recent EURUSD decline
  • Geopolitical risks in Ukraine are adding to Eurozone woes
  • Rumours emerging of EUR/CHF peg break

EUR/USD hit 11-month lows of 1.3153 during the Asian trading session on Tuesday as the market continued to buy US dollars and sell the single currency. The Jackson Hole Symposium last weekend only served to intensify this direction for the pair. While Federal Reserve chair Janet Yellen left her cards on the table regarding the timing of an interest rate hike in the US, European Central Bank (ECB) head Mario Draghi indicated a more defensive approach.

The intentions in Europe are to stick with those policy decisions introduced in June this year. This came as no surprise. Draghi's remarks concerning the unemployment problem across the continent have certainly been a key factor in the recent EUR/USD decline. He explained that if a single nation in the Eurozone did not have a high level of employment, this would be a damaging factor across the continent. High unemployment in one or a small number of nations would have an adverse effect on the cohesion of the group. Essentially his message was that one nation with good employment will not balance another nation with poor employment.

The resignation of France’s government enabled EUR traders to act with conviction on Monday, but as the week rolls on it is becoming increasingly difficult to establish whether this EUR/USD roller coaster is on a straight-forward decline or it is likely to encounter twists and turns along the way.

German Finance Minister Wolfgang Schaeuble remarked on Wednesday that Draghi had been over-interpreted regarding the ECB’s intentions to generate monetary stimulus more directly. As a result, buyers at 1.3153 had more conviction and this has pushed the pair up to 1.3219 during London trading hours on Thursday. In any case, economic sentiment came in below expectations on Thursday morning, whilst consumer confidence for August across the Eurozone also came in lower than it did previously.

Mixed messages from world leaders regarding a de-escalation of the conflict in Eastern Europe have been prevalent as well. Talks in Belarus between Vladmir Putin and Ukrainian leader Petro Poroshenko led to an easing of market nervousness earlier in the week, but news of a suspected invasion has heightened the market’s focus on that region.

German inflation data has recently come in on par with expectations at 0.8% for the month of August. Lastly, a revision to fourth quarter US GDP from an original estimate of 4% to an even better 4.2% has piled pressure on EUR/USD.​

Many economists do not see an end to the strength of USD, and recent signs that the ECB is holding firm in its fight against deflationary pressures could possibly signal one path for EUR. This does not necessarily, however, mean that there are not going to be spikes along the way. This has been clear this week. As EUR/CHF reaches lows of 1.2057 not seen since December 2012 there are also rumours that the Swiss National Bank may allow the 1.2000 peg in EUR/CHF to be broken. This would be likely to accelerate the pace of EUR/USD decline greatly. At the moment though these rumours  are exactly that: rumours. Ultimately however, the overarching themes that emerge from last week’s meeting in Wyoming appears to have set the precedent for some time to come.

How will sterling trade against the US dollar? Trade EURUSD as spot, forward and as an option today.

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.