In our last take on the euro in April, we wrote that the bullish case for the currency was running out of drivers. Specifically, we wrote that decelerating Eurozone growth (in rate-of-change terms), changes in trading patterns and overly bullish speculator sentiment was likely to weigh on the euro in the future. At the time, EUR/USD was trading around 1.23, near its 2018 high just above 1.2550.
As a ‘risk on’ currency, the euro tends to weaken when Eurozone growth is decelerating in rate-of-change terms. Looking at the data, Eurozone growth peaked in late 2017. However, the euro did not start weakening until the second quarter of this year. While changes in growth and inflation drive currencies at a macro level, traders still need to respect day-to-day trading patterns in order to maximize their profits. As a research service focused on currencies and commodities, we pay close attention to both economic data as well as quantitative trading patterns such as trading volumes and volatility.
So far, our non-consensus view has been proven correct as the euro has sold off sharply since April. Going forward, we expect the euro to continue selling off thanks to (1) slowing growth, (2) slowing inflation and (3) outsized speculator positioning relative to recent history. As a trading recommendation, we recommend shorting EUR/USD towards the upper end of its daily trading range (updated daily).
Falling sentiment + steepening base effects = slowing growth
Since late 2016, year-over-year Eurozone growth has been rising in rate-of-change terms. While many claim that the euro strengthened last year because of Macron’s victory in the French presidential elections, the reality is that the currency was also helped along by improving economic data. In particular, forward-looking indicators (such as manufacturing sentiment) rose sharply while year-over-year growth figures were helped by weak comparables. That is, relatively weak growth in 2015 and 2016 (the denominator) helped Eurozone growth accelerate to 2%+ without any hiccups. This is highlighted below:
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