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The Euro Declines As ECB Triggers Stimulus Speculation

euroAfter hitting a high of 1.1375 in the second week of February, 2016, the Euro continues to weaken against the US dollar and other major currencies. Most of the currency market analysts believe that the decline would extend into March when the European Central Bank (ECB) would meet again to decide the course of the stimulus program based on the inflation scenario.

After looking at the minutes of the ECB meeting held yesterday, market participants believe that the governing council will go ahead with the stimulus expansion in the next month. The ECB President Mario Draghi prefers a weak Euro, which will ultimately boost the competitiveness of the Euro-zone countries.

Furthermore, a weak Euro would increase the cost of imports, thereby reducing the deflationary threat. Keeping this in view, the strengthening of the Euro, earlier this month, naturally calls for an expansion of the stimulus program.

However, the economists will vouch for the fact that in the long-term a weak currency is not good for any economy. Before the common currency was brought about, Germany’s strong Deutsche Mark ensured that the industries in that country remained economically competitive. However, even with a stimulus program in place, the Euro zone is yet to face any kind of disadvantage primarily because of the low price of oil.

Thus, the ECB governing council, hoping that the low price of crude will persist in the near future, has indicated that it would expand the stimulus program and flood the market with further liquidity. Ultimately, this would weaken the Euro.

On the other hand, for the past two weeks, the economic data from the US is encouraging. The employment and business data indicate that the world’s largest economy is in recovery mode. The weekly unemployment claims fell to 262K against the analysts’ estimates of 275K in the week ending Feb 12. Similarly, the Philadelphia manufacturing index recorded a decline of -2.8 compared to the analysts’ expectation of -2.9.

As the US economy recovers, the country will have no need for any kind of stimulus programs. Thus, Fed would consider a further hike in the interest rate. A rise in the interest rate would theoretically strengthen the US dollar as there would be capital outflows from emerging economies. A strong US dollar would put pressure on the Euro. Thus, considering these facts, strong economic data from the US continues to push the EURUSD currency pair further downwards.

Analysts now believe that the ECB’s indication of further monetary easing would re-trigger large speculative bets on monetary divergence (the Fed and the ECB is moving in the opposite directions) thereby leading to a steep decline of the EURUSD pair.

Technically, as shown in the image below, the EURUSD pair is currently in a weekly bearish zone. The pair should break and stay above the 1.11790 level firmly to trigger buying interest.

EURUSD pair - 19th feb 2016

A break above 1.1282 would indicate a bullish trend reversal. Thus, it would be ideal for a forex market trader to go short at 1.1150 levels with stop loss above 1.1280 levels.

The target price would be 1.0935. The risk to reward ratio for the trade is approximately 1:2. In the case of a binary options trader, a put option contract with March end expiry can be purchased. The suggested strike price for the contract is 1.1150 levels.

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