Euro to soar on Germany’s y-o-y GDP growth of 3.1%

The equity market recovery around the world caused the Euro to tumble in the second week of August. It looks rather strange but it was one of the primary reasons for the Euro’s decline.

When an overseas fund wish to purchase stocks in the European market, say CAC (France) for example, the fund manager has to sell the US dollar and buy the Euro.

If the stock goes up by about 15% in the next two months, the fund would benefit only if the EUR/USD exchange rate remains stable.

In a case the Euro depreciates by 10%-12% against the US dollar in the same period, the profit generated from the equity market would get erased by the losses arising from the currency conversion. In order to protect the profit, the fund manager has to hedge his position by taking a short position in the Euro.

Such a scenario ensured a steep decline of the Euro dollar against the major currencies such as the Japanese Yen. The safe haven appeal of the Yen and the unimpressive stimulus announced by the BoJ also aided the EUR/JPY currency pair’s decline. The EUR/JPY pair touched a low of 112.64 last week and is currently hovering around the 113 level. We believe that the EUR/JPY is all set for a decent recovery in the weeks to come due to the reasons provided below.

Al Jazeera English

As per Markit, the private sector output of France recorded its fastest growth in the past 10 months. The Purchase Manager’s Index reading of France increased to 51.6 in August, from 50.1 in July. The analysts had expected a reading of 50.1. Similarly, in the Euro zone, the GDP of Germany expanded by 3.1% in the second quarter of 2016, compared to the similar period last year. On a q-o- q basis, the economy of Germany expanded by 0.3%.

On the contrary, in the second-quarter of 2016, the economic growth of Japan remained flat on a sequential basis. On an annualized basis, the economy grew only 0.2% and below the analysts expectation of a 0.7% growth. The most worrisome fact is the 0.4% y-o-y decline in the June inflation rate. This shows that the measures taken by the BoJ to increase inflationary pressure is failing. Considering these fundamental aspects, we believe that the EUR/JPY would rise in the short-term.

Technically, the chart reveals a strong support for the EUR/JPY pair at 113.15. The stochastic reading of about 25 reflects an extremely oversold scenario.

Thus, a currency trader should consider taking a long position near the support level. To protect losses from an unexpected increase in volatility, a trader should place a stop loss order below 112.50. The long position can be closed when the EUR/JPY pair rises to 114.60.

A similar position can be taken by a binary options trader through the purchase of a one touch call option. The target level for the recommended one touch trade should be about 114.50. The binary trader should ensure that the call option contract remains valid till the third week of September.

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