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02.07.2020 09:16 AM
Euro: the threat of declining after rising

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By the end of this week, the European currency has opened a second wind thanks to the positive macro statistics on the eurozone. Germany's economic indicators played an important role in this, giving the euro an impulse for further growth. However, experts warn about the pitfalls waiting for the euro on this path.

The potential correction of the EUR/USD pair caused by the current imbalance could be one of these barriers. Despite the strengthening of the euro's growth rate and the storming of the next peaks by the EUR/USD pair, experts are afraid of a deafening decline of the pair. According to analysts' observations, there are all prerequisites for further correction, including a deterioration in global market sentiment and the strengthening of the second wave of COVID-19 in the United States.

On the first day of July, the EUR/USD pair was trading in the range 1.1247-1.1248, sometimes showing attempts to decline. However, on Thursday morning, July 2, the EUR/USD pair "went on the attack" and was able to rise to 1.1263 - 1.1264. Experts have recorded a surge in pair's volatility, which has recently been extremely controversial.

According to experts, sharp ups and downs in the EUR/USD pair can hurt the euro more than the dollar, which is initially more stable. The demand for the dollar as a defensive asset is gaining strength again, which helps it to maintain its leading position. Moreover, additional support to the US currency is provided by the deterioration of the global epidemiological situation. The vector of investor interest is still directed towards the US currency although the Eurocurrency recently managed to "pull the blanket" over itself.

The euro was greatly appreciated by positive macroeconomic reports on the eurozone as a whole and Germany in particular. On Wednesday, July 1, May indicators of retail sales in Germany were published, which exceeded the expectations of most experts. This indicator increased by 13.9% compared to April 2020, when retail sales fell 5.3%.

Data on the German labor market also contributed to the positive growth in the euro: the unemployment rate rose to 6.4% compared with 6.3% recorded in May. According to Markit, the index of PMI procurement managers for the German manufacturing sector in June also increased (up to 45.2 points). In the last month of spring, this indicator did not exceed 36.6 points.

Last month, the manufacturing sector of the eurozone was on top. The total index also came out better than expected, although its growth was minimal (up to 0.3%). The core inflation in the EU countries was more pleasing, which fully met analysts' expectations, slowing down to 0.8%. The current situation has added positive to the single currency, although business activity in the eurozone is still far from pre-crisis levels.

According to experts, the next few weeks will be filled for the EUR/USD pair. Previously, the pair, like the single currency, followed the dynamics of the US currency, but now, the upcoming EU summit scheduled for July 17-18 is most relevant for the euro.

Last month, the euro more often the slave, and the dollar played the first fiddle at trading. At the moment, the situation has changed, and fortune turned to the euro. Now, the single currency can become the driver of the EUR/USD pair, taking the reins of government into their own hands. Thus, it is important to stay afloat for the euro, avoiding sudden changes in dynamics. Analysts warn that a sudden collapse can cross out all the achievements of the eurocurrency.

Despite the fact that the dollar is still a key asset of the "safe haven" and a favorite of investors, the Euro has a good chance to rise and push it. However, in the case of such a rise, experts warn that a decline is inevitable, which will strongly hit the dynamics of the euro. However, a number of advantages (for example, high interest rates in the US) remain on the side of the dollar. Against this background, many economists expect the US currency to strengthen against the Eurocurrency by 2% -2.5%, which is why the EUR/USD pair may decline below the level of 1.1000 by the end of 2020.

At the moment, these two currencies remain in the grip of strong multi-directional factors, which can cause problems for the EUR/USD pair over the coming months, preventing it from sharply changing its current direction.

Larisa Kolesnikova,
Experto analítico de InstaForex
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