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05.03.2020 10:39 AM
Euro became weak: the highs were overcame, but consolidating failed

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The financial markets closely watched the efforts of the European currency throughout the week. Experts came to the conclusion that the "European" managed to get to two-month highs, however, it was not able to consolidate on these peaks and even more so to ascend higher. Nevertheless, analysts are optimistic about the future prospects of the euro.

On Wednesday, March 4, the European currency was supported by an emergency cut in the Fed rate by 50 basis points (bp), to the target range of 1.00% to 1.25%. It can be recalled that the meeting of the American regulator took place two weeks before the scheduled meeting on the most important economic and political issues related to overcoming the consequences of the coronavirus COVID-19.

The measures taken by the Federal Reserve partially weakened the dollar and gave a break to the euro. However, the "European" currency did not succeed in taking full advantage of this advantage. At the beginning of Wednesday trading, the single currency added 0.1%, reaching 1.1176, but the impossibility of overcoming the two-month high of 1.1213 prevented further growth. This led to the EUR rate consolidating, and by the middle of yesterday, the "European" was trading near the level of 1.1147, having lost 0.26%. Over the course of Wednesday, the EUR/USD pair repeatedly tried to increase, but the pair failed to rise above the level of 1.1160.

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On Thursday, March 5, the EUR/USD pair remains in a downward trend, working around the range of 1.1137–1.1138. According to analysts, the pair will move in this range in the near future. Earlier, the euro could not overcome the level of 1.1246, which is considered to be a strong obstacle to new highs - and so, it slipped into a correction.

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According to expert observations, the "bulls" on the euro fully controlled the current situation while the quotes of the EUR/USD pair were above 1.1135–1.11140. The chances of the "bears" were very low and were close to zero after an emergency cut in the Fed rates. Moreover, experts emphasized the actions of the Federal Reserve actually releasing the "bulls" on the euro. Thus, positivity in the current situation added the rise of the "European" currency by almost 4% over the past eight days. The fact that the dollar gradually began to strengthen against its European competitor did not diminish the optimism of the bulls. The dollar, in turn, was supported by strong statistics on the labor market in the United States. According to the US Employment Report provided by ADP, the US labor market remained strong last month. Economists recorded the presence of 183 new jobs, which coincided with current forecasts.

A minor problem was positive data on the services sector of the eurozone countries. Experts recorded an increase in activity in France and Italy, while this figure decreased significantly in Germany. According to Markit, the index of PMI procurement managers for the Italian services sector in February 2020 increased to 52.1 points compared to 51.4 points recorded in January. In France, this figure reached 52.5 points against 51.0 points a month earlier, while a marked drop in activity in the service sector was recorded in Germany. Nevertheless, the PMI index in Germany remains above 50 points, which indicates prospects for further growth.

According to experts, the spread of the coronavirus COVID-19 is making its own adjustments to the current statistics, so it is useless to expect a significant increase in indicators in March 2020. Analysts warn of a slowdown in the manufacturing sector of the eurozone and a significant drop in demand for services. Generally, the index of purchasing managers for the service sector rose to 52.6 points in the Eurozone, while the retail sales index also recovered, adding 0.6%, which indicates an increase in household consumption. However, analysts are sure that the spread of coronavirus will make its negative contribution in the second quarter of 2020, which will lead to a reduction in this indicator.

The key factor for the further dynamics of the European currency may be a high (90%) probability of a reduction in the deposit rate by the ECB. Currently, it is minus 0.50% and experts admit its decrease by 10 bp next week.

According to experts, a single currency can lose the American one in the near future and get away from current highs. However, in the medium-term, the position of the euro looks more optimistic, although it will face obstacles in the form of weak economic growth in the eurozone and a reduction in inflation expectations. Nevertheless, experts are counting on the restoration of the "European" and fixing it on the next peaks.

Larisa Kolesnikova,
Experto analítico de InstaForex
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