Having declined by 1.5% in January, it would seem that the EUR/USD pair violated the basic principle of fundamental analysis: “A strong economy is a strong currency”. US GDP in October-December grew by 2.1% y/y, during the year – by 2.3%, while its European counterpart – by a modest 0.1% q/q and 1% y/y. Moreover, in the fourth quarter, the two largest economies in the eurozone, represented by France and Italy, unexpectedly declined. Nevertheless, the release of statistics on economic growth, instead of helping the “bears” on the main currency pair to continue the southern campaign, on the contrary, gave them a pig.
The dynamics of eurozone GDP
Net export turned out to be the main driver of US GDP growth. Its contribution amounted to 1.5 pp against the background of a record decline in imports since 2009. The indicator is declining not only due to the introduction of duties by the White House but also due to weakening domestic demand. Thus, the growth of consumer spending in the United States in the fourth quarter slowed from 3.2% to 1.8%. The eurozone’s gross domestic product was revised upward in July-September, and the problems of the French economy are related to the usual correction after rapid growth in the third quarter. Also, GDP statistics are lagging, while the leading indicator from the OECS signals a recovery in the eurozone economy in January-March 2020.
Dynamics of European business activity
States, by contrast, risk losing steam in the first quarter due to Boeing’s financial problems and the loss of growth drivers such as fiscal and monetary stimulus. The releases of data on business activity and the US labor market will be the central events of the week by February 7 and may turn out to be the beginning of the end for the “bears” on EUR/USD. “Bulls” in the euro will continue to restrain the Chinese coronavirus, which will most likely peak in the middle of the last month of winter. According to Bloomberg estimates, due to the epidemic, China’s GDP may slow down to 4.5% in the first quarter. It is not the best news for official Beijing, which expects a 6% growth for the year. It will double the size of the economy compared to 2010.
Another deterrent is the potential US-EU trade war. Donald Trump’s appetites are great. He will certainly demand supplies of chlorinated chicken banned by Brussels to Europe, and will also retaliate in response to the European Union’s carbon tax. The escalation of the conflict will force Bloomberg experts to make adjustments to the forecast of 1.16 for EUR/USD at the end of 2020. Yes, the US GDP is likely to continue to slow down, and the Fed, including due to the inversion of the yield curve, will have grounds for lowering the federal funds rate, but a new trade war will not raise the head of the eurozone economy and increase the risks of easing the ECB’s monetary policy.
Technically, after reaching the target of 88.6% for the “shark” pattern, the probability of EUR/USD correction in the direction of 23.6%, 38.2% and 50% of the CD wave increased. We are talking about the levels of 1.105, 1.1085 and 1.112.
EUR/USD, the daily chart