Home Forex Analysis And Forecasts EURUSD drops to 1.26 for first time since November 2012

EURUSD drops to 1.26 for first time since November 2012

The major news today is that the EURUSD recorded its lowest valuation since November 2012, hitting 1.2697. The pair has recorded substantial losses over the past 48 hours as continuous soft economic data further dents an already weak EU sentiment. Comments from ECB President Mario Draghi over the past 24 hours have also encouraged investors to price in further action from the ECB.

There’s no denying the EU data this week has been weak. Both the German IFO and German Markit Manufacturing PMI missed forecasts. This alone dashed any hopes German data might be returning to consistency. Additionally, Tuesday’s Markit Eurozone PMI missed expectations, elevating fears of stagnant economic growth within Europe.

Before the Eurozone Markit PMI was released on Tuesday, I was hopeful a weaker EURUSD exchange rate (drop from high 1.39s to 1.28) would help EU competitiveness. However, we are yet to see this in economic releases and while it will perhaps require more time to see an improvement in EU data, investors are clearly losing patience. This is evident by the Eurodollar dropping by nearly 180 pips within 48 hours.

At the time of writing, Draghi is speaking in Lithuania and it seems the hot selling period we unexpectedly encountered this morning is pausing slightly. However, Draghi’s comments on French radio yesterday that the he will do all in his power to stimulate EU growth and remains committed to using all tools at its disposal to achieve this has already encouraged the bears to awake.

Draghi’s comments raised the possibility that the ECB will act once again next week. Introducing Quantitative Easing seems to be what everyone is talking about, but I remain unconvinced QE is the answer. If the EU’s economic problems are due to a lack of bank lending, which is in turn resulting in a reduced amount of money being spent within the EU economy and low inflation, then the next potential steps for the ECB are to cut rates completely to 0% and continue raising negative deposit rates. If a continuation of raising negative deposit rates correlates in no improved data by the end of 2014, then it’s time to talk about QE. QE is being seen as a last resort measure for the ECB and it should be used as exactly that, a last resort.

GBPUSD has declined after again falling short around the 1.6408 resistance area. I was expecting this area to be surpassed today after Bank of England (BoE) Governor Carney speaks in Wales later on and is expected to reiterate that a UK rate rise can be expected in Spring, but now it has emerged that UK Prime Minister David Cameron is set to recall parliament on Friday morning. The recall is for an emergency debate to win support for airstrikes in the Iraq/Syria region, and I am expecting the brakes to be put on a potential upside rally for the GBPUSD as a result.

It does appear very likely that the UK will join the newly formed international coalition in the battle against the Islamic State, and as such the GBP will likely take a hit. In the meantime, GBPUSD support can be found around 1.6276 and 1.6222.

If the pound is affected by the UK joining the coalition, I would expect it to be a short-term loss. The USD also suffered weakness after President Obama confirmed airstrikes in Syria, but recovered losses less than 24 hours later. For either currency to decline substantially due to participating in this conflict, it will require military troops to be sent to the region. Once Westminster formally confirms what extra political powers Scotland will be awarded and Prime Minister Cameron declares intentions in the Middle East, investor appetite in the GBP should return. The BoE are moving closer and closer to a UK rate rise, and investors will be attracted to this as a rate rise is definitely not yet priced into the Cable.

Published On Thu, Sep 25 2014, 10:35 GMT

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