Why the Euro May Drop

The Euro is poised for further losses, according to some experts. Despite recent drops in price in comparison to the dollar, the Euro has leveled off a bit, but it seems that this stability is only an illusion. This is happening for two main reasons. The first—and biggest—is that the European Central Bank will be releasing an interest rate decision on June 6th. Experts are warning that this will not be favorable to the Euro’s international value. The second big factor is that the major alternative to the Euro—the U.S. dollar—looks like it will be moving up in international regard over the coming days, and this is sure to drive demand for the Euro downward and thus make its value drop. Let’s look at each one of these things individually.

The European Union is bogged down in a recession at the moment, and interest rates are illustrating this. A negative interest rate policy is expected to be implemented, and this, at least for the time being, will have a profound impact on the Euro. There are clearly some major problems looming in this region; consider the Greek and Italian economies as examples. For the Euro to start posting long term forward progress, these underlying issues will need to be corrected. Even major economies like the one in Germany are facing some problems. Unemployment, especially in the younger demographic, is still an issue here.

The central bank is attempting to correct this, but in the short term, going long on the Euro is probably a bad idea. The EUR/USD is currently at 1.2865, and while a little recovery is natural and to be expected, the 1.3000 mark is extremely unlikely. Actions have been range-bound for several days at this point, but as June 6th gets closer and the announcements that the ECB makes become more solidified, the EUR/USD will probably fall in value. Pay attention to the major technical chart patterns in order to benefit as much as possible from this.

This leads to the second point. The USD is on the benefiting end of the Euro’s fall, but it is also getting stronger because of fundamental domestic reasons, too. Putting aside that the dollar is gaining against the Japanese yen and the British pound, there are some other major factors that are currently helping the greenback. For starters, economic conditions in the United States are improving. The unemployment rate is dropping slowly. More people in the workforce means more stability for the currency and increases the international demand, thus driving up the price. Add to this the fact that the U.S. housing market, something that has been consistently driving down the dollar because of a gloomy outlook, is on the mend, and you have two strong factors influencing the dollar’s international power.

Consumer confidence in the U.S. is also going up thanks to these factors. So this might be a self fulfilling prophecy, but it is still happening. The better consumer confidence is, the more often dollars will be changing hands, and this also contributes to boosting prices.

Fluctuating currency prices are caused by many different factors, some of them more relevant and potent than others. It is natural for any asset’s price to shift up and down, but right now, the factors seem primed for allowing the U.S. dollar to keep going up for the foreseeable future. A stronger U.S. economy is playing a larger role here, as is the faltering of other currencies. However, this doesn’t mean that the numbers will go up unchecked. If you are a short term Forex trader, you will still want to consult the technical indicators and be hyperaware of where support and resistance levels are in order to give you a better feel for where short term prices might be headed. Minor price reversal still happen in up trends, so you still need to be aware of these things.

This entry was posted in currency.
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