A strong economy is a strong currency, a weak economy is a weak currency. This truth is as old as the world and continues to work like a clock. At the end of the fourth quarter, German GDP failed to grow, expanding by a modest 0.6% in 2019, which is the weakest result since 2013. These figures can not be compared with the American indicators, which allows the EUR/USD pair to determine the direction. It goes south and has already reached its lowest level since April 2017. Will there be more?
The dynamics of German GDP
Gross domestic product is an important but lagging indicator. Is it worth focusing on it, because it’s February, and the data came out for October-December? The problem is that little has changed since the fourth quarter and the emergence of a new external stimulus, the coronavirus, will only worsen the situation in the German economy. It is open, export-oriented and has a significantly higher share of deliveries to China and Asia in general compared to the United States. Consequently, the slowdown in China’s GDP to 4.5% in January-March, according to the forecast of Reuters experts, will bring more pain to the eurozone than to the States. It is not for nothing that the euro is sensitive to the dynamics of the Chinese yuan. In 2018-2019, their connection was due to a trade war, in 2020 – an epidemic.
Dynamics of the euro and the Chinese yuan
If one of the reasons for the collapse of EUR/USD in the week to February 14 was the expectation of weak statistics on German GDP, then within five days to February 21, such an irritant may be the release of data on business activity in Germany and the eurozone. Along with the publication of the minutes of the Fed and ECB meetings, it will attract increased attention of investors. Unlike the gross domestic product, the purchasing managers’ index is a leading indicator. It is simply obliged to show the consternation of the companies of the Old World because of the coronavirus.
Perhaps the EUR/USD peak would not have been so rapid if it had not been for talk of divergence in monetary policy and the status of the euro as a funding currency. Encouraged by the resilience of the US economy, US stock indices regularly update historical highs and lead equity markets around the world. As a result, carry traders gradually return to the game, buy risky assets and sell funding currencies.
Jerome Powell and his colleagues are optimistic about the current situation and prospects for the US economy and believe that it will be able to grow above trend in 2020. There is no reason to lower the Federal funds rate, but rumors of an easing of the ECB’s monetary policy are growing like a snowball. Thus, divergences in economic growth and monetary policy, the status of the dollar as a safe haven asset and the euro as a funding currency are key drivers of the EUR/USD downward trend.
Technically, the main currency pair reached the target of 113% on the “Shark” pattern. If the “bulls” manage to catch on to the current levels, the probability of a pullback to 23.6%, 38.2% and 50% of the CD wave will increase as part of the “Shark” transformation to 5-0. On the contrary, if the “bears” attacks are not contained, we should expect the continuation of the peak to the pivot levels of 1.075 and 1.063.
EUR/USD, the daily chart