EUR to USD Could Fall Below Parity: Here’s Why
The EUR to USD exchange rate could show a dire performance in 2017. If you think the euro could hold the current level, you could be making a big mistake. The EUR/USD currency pair could fall below 1.0, which is lower than parity.
Here’s what must be really understood: for the EUR to USD exchange rate to increase, the eurozone should see some economic growth, or have indicators pointing towards it.
Sadly, the eurozone is struggling.
If you think there are any improvements, think again.
For example, look at France, the second-biggest economic hub in the eurozone. In the month of October, manufacturing output in the country declined 0.6%, that is, after it already declined 1.4% in September. (Source: “In October 2016, Manufacturing Output Diminished Again (−0.6%),” National Institute of Statistics and Economic Studies, December 9, 2016.)
Since the beginning of 2016, manufacturing activity in France has been dismal at best.
There aren’t any hopes for major growth in France’s economy either. The International Monetary Fund (IMF) expects France’s economy to grow 1.3% in 2016 and 1.3% in 2017. (Source: “World Economic Outlook October 2016: Subdued Demand—Symptoms and Remedies,” International Monetary Fund, last accessed December 13, 2016.)
Mind you; these forecast are usually utterly optimistic, and tend to get revised lower.
Keep in mind, I am not trying to single out France. Other major regions in the eurozone are struggling as well. With this, you have to question where the EUR to USD could go.
Here’s what you also have to consider: the disparity between the U.S. Federal Reserve and the European Central Bank (ECB). This factor alone could take the EUR to USD exchange rate much lower.
It’s critical to understand that the Fed is adamant about raising rates, while the ECB is printing money and has kept its interest rates below zero.
Economics 101: higher interest rates are attractive to investors. This could cause investors to rush toward the U.S. dollar and ditch the euro. In the midst, the EUR to USD exchange rate could hit below parity.
With all this said, please look at the chart below and pay close attention to the circled areas.
Chart courtesy of StockCharts.com
Looking at the EUR/USD chart, there’s bearish sentiment pouring.
Since October, the EUR to USD exchange rate has been finding resistance at its 50-day moving average. The price touches this moving average and drops. At the very core, this suggests that the intermediate-term trend is pointing downward, and investors and traders are outright bearish.
What’s also interesting to note here is that on December 4, Italy had a referendum asking whether Italians approve a law that amends the Italian constitution. The majority voted against it. After this, the euro rallied a little, but failed to go higher. It was expected that there would be a much bigger rally.
EUR to USD in 2017: Dismal Outlook Ahead
The outlook for EUR to USD in 2017 is dismal, to say the least.
As I see it, there isn’t a lot working in favor of a higher euro. A significant amount of data suggests that EUR/USD could fall well below parity. Keep in mind, the EUR to USD exchange rate currently stands at 1.06. This is just roughly six percent above parity.