The Euro Is Declining Due To Stagflation Concerns – High Inflation And Low Growth. Traders Are Selling Off Their Euro Holdings

The euro is being abandoned by traders at a rapid pace due to concerns that the European Central Bank (ECB) will struggle to tighten monetary policy further, despite inflation running far above target. Although data this week showed that consumer-price growth had re-accelerated in Spain and France in August, the market believes that the ECB’s cycle of interest-rate hikes is as good as over. After a string of poor economic figures and comments from ECB member Isabel Schnabel on the dire outlook, there are now doubts about whether there will be a pause at the next meeting.

Many bulls are worried that Europe is facing stagflation, which is a combination of weak economic activity and high inflation, and as a result, they are capitulating, dragging the euro lower. The euro fell as much as 0.4% to $1.0885 on Thursday, taking losses from a peak in July to more than 3%.

Analysts have cut their median forecast for the currency for the first time in six months. Firms such as Bank of America Corp. and JPMorgan Chase & Co. see it falling towards $1.05, a level last seen during the banking crisis in March. BNP Paribas Asset Management says it could reach $1.02.

“The economy is weakening, but core inflation remains stuck. If the weakness we have seen so far is not enough to bring inflation down, the economy needs to weaken even more,” said Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America. “That’s the main concern for the euro.”

Back in January, when inflation had just peaked at double digits and the ECB hiking cycle was in full swing, several analysts were bullish. Both leveraged funds and institutional investors have held a net long position on the euro for nearly a year, helping the currency steadily recover from a two-decade low reached in late 2022.

The economic outlook for Europe is uncertain at the moment.

Although consumer-price growth has decreased significantly, it is expected that inflation is still higher than desired. Moreover, the recent weak PMI data suggests that the impact of rate increases is starting to show.

According to Jane Foley, head of currency strategy at Rabobank, the market should question if it remains too long for the euro under these circumstances.

As per money markets, policymakers will conclude the tightening cycle with a final quarter-point hike to 4% later this year but will opt for a pause in September.

Analysts have adjusted their expectations as well. The median forecast in a Bloomberg survey has now dipped to $1.10 by the end of the year, from $1.12 last week.

On the technical side, momentum indicators have weakened, with a break of the euro-dollar 200-day moving average clearing the way for more losses. Options markets indicate that traders are becoming bearish, with the premium-to-own downside exposure widening lately.

The euro area is also under pressure due to a growing economic crisis in China, which is a bigger trading partner for the bloc than the US. This could impact exports from Germany and other countries in the region.

Nomura’s currency strategist Jordan Rochester wrote in a note that the market narrative has shifted from a ‘soft landing’ US disinflation theme to the risk of a slowdown in China and Europe developing as the new narrative.

Even HSBC Holdings Plc’s Dominic Bunning, who has one of the highest forecasts for the euro by the end of the year at $1.15, said it is becoming “harder and harder” to stay bullish as the data downturn in recent weeks signals a “cyclical challenge.”

Given the divergence in the economic outlook for Europe and the US, Peter Vassallo, a portfolio manager at BNP Paribas Asset Management, said the euro should be trading close to $1.02 — not far off the lowest level against the dollar in two decades reached last year.

“I’m surprised the selloff in recent weeks has not been more dramatic,” he said. “When we talk about the resilience of global growth and the resilience of the world economy, really what it is is US resilience.”

EUR/USD Short (Sell)
Enter at: 1.08072
T.P_1: 1.05365
T.P_2: 1.03068
T.P_3: 1.00284
T.P_4: 0.98190
S.L: 1.12013



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