How Low Can Euro-Dollar Go?
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- EUR/USD in bearish descending channel
- Poor data and technicals threaten further weakness
- Hold below 1.0925 key for bears to take control
The Euro-to-Dollar exchange rate is likely to continue falling due to poor economic data from the Eurozone and a negative technical outlook, says Fawad Razaqzada, a market analyst at broker Forex.com.
EUR/USD has just posted a new low for the year at 1.0922 and if it can firmly hold below the previous 1.0925 low it is tipped to fall even further, according to the analyst.
Poorer-than-expected PMI activity data results for September on Monday which reflected further pessimism in the key manufacturing and services sectors helped start the Euro’s sell-off.
“The shared currency tried to shrug off soft Eurozone data that was published earlier in the week, but the bears ultimately maintained control after the bulls made a more sober assessment of the situation and realised more monetary stimulus might be needed than a tighter policy to support a flagging economy,” says Razaqzada.
More monetary stimulus from the ECB risks weakening the Euro, firstly by increasing the supply of Euros in the system and secondly by lowering interest rates.
Lower interest rates then make the country less attractive to foreign investors searching for somewhere to park their money and net inflows fall, reducing demand for the currency.
In contrast, “the Dollar is likely to remain supported even if the Fed is cutting rates again. This is because the US economy continues to remain in a better shape than most other economic regions in the world,” says the analyst.
According to Razaqzada, “the next question will be how long can Euro go?”
He sees the pair possible falling in its current steadily declining channel down to a target in the lower 1.08s.
It is often the case on price charts that levels which once provided support if broken, turn into levels of resistance.
An important first step in EUR/USD’s decline, therefore, would be for the exchange rate to hold below the former 1.0926 yearly lows.
These lows would then probably turn into resistance which the pair would have difficulty breaking above, “leading to further falls,” says the analyst.
Using Fibonacci extension levels, calculated based on the famed ‘golden mean’ or 0.618 ratio, an important Mathematical ratio with special qualities, the pair could fall to targets at 1.0877 (a 127.2% extension) and 108.14 (a 161.8% extension).
The importance of the hold below the yearly lows at 1.0925-6, however, is emphasised as a prerequisite for declines.
“If the EUR/USD refuses to hold below 1.0925 after a brief break lower, then in that case we will have to entertain the bullish scenario,” says Razaqzada.
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