Future Scenario For The Euro? Further Down
| Nov 08, 2018 02:41AM ET
Bullish sentiment towards the European currency, observed in the last few days is explained by hopes for the upcoming Brexit deal and the 2018 Senate midterm elections. The effect, created by these political events, however, isn’t that apparent.
Brexit secretary Dominic Raab predicted a deal with EU to be finalized by November 21. This long-awaited news boosted purchases of euro, sterling, aussie and kiwi by the proponents of risky assets’ growth. Yet, this optimism will hardly last. The parties were close to reaching consensus before, but they still failed to find a way out of an impasse regarding the border between Northern Ireland and the Republic of Ireland. Not long ago, the leader of the Democratic Unionist party said that no real progress on the border negotiations had been made so far, and that agreement between Britain and EU was one step away from failure, which would lead to a harsh Brexit.
The results of the midterm elections are quite optimistic, which favors the US dollar. The hope is that dominant democratic opposition in the House of Commons can become an obstacle for the implementation of Trump’s legislative initiatives. However, this scenario is extremely unlikely, since the Republicans managed to keep hold of their majority in the Senate, which includes Trump, saving 51 seats, while Democrats got 42.
Italy’s budget dispute is a downside factor for the Euro. Italy has until November 13 to submit a new budget plan to the European Commission. If Italy fails to take steps to bring the plan in line with the fiscal rules, it may face disciplinary action. The latest comments by the Italian government, however, clearly indicate that the budget plan will not be revised.
Eurozone GDP growth data doesn't look to be supportive of the Euro as well. According to the figures for the 3rd quarter, the GDP grew 1.7% q/q versus 2.2% q/q in the previous quarter. Personal consumption leaves much to be desired too. Trading uncertainty paired with obvious environmental certification struggle by the Eurozone’s automotive industry has already lead to a massive economic decline in the European region. Some experts say that this is just the beginning. In such conditions, it’s only logical to expect the European Central Bank to keep its soft monetary policy, which runs counter to the strong currency. Taking into account all of the above mentioned, we recommend opening short positions in the EUR/USD, with the decline target at 1.10 by the end of the year.
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