Why is the euro declining and how long will it continue its downward trend?

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The euro fell in early trading on Friday, hitting a 34-month low of $1.0828. The EUR/USD has fallen in every February session, except for one, where the gains were very small and negligible.

February to date EUR/USD is down 2.2% of its value, extending its losses by 1% from January.

The German economy versus the American economy

Today's weakness comes after the recession in the German economy. The quarter's largest economy in Europe posted 0% growth. However, this is just the tip of the iceberg, industrial production and factory orders are declining, the manufacturing sector is still in contraction and the impact of coronavirus remains unknown but likely to be hard to defeat. Europe's largest economy is already on its knees and another kick may be coming.

On the other hand, the recent data from the US paints a strong picture of the US economy. Strong job creation, 3% wage growth and restoration of the manufacturing sector.

The European Central Bank vs the Federal Reserve

Given the deteriorating health of the Eurozone and especially the German economy, rumors are circulating that the European Central Bank may adopt a more pessimistic stance with more easing.
Hearing from Jerome Powell earlier this week, the Federal Reserve's assessment of the US economy remains cautiously optimistic. Jerome Powell believes that the current expansion of the US economy is continuing and the current monetary policy is appropriate.

new corona virus

The extent of the damage that the Corona virus will cause to the Chinese economy and its indirect effect on the US economy or the German economy, is unknown. However, the German economy is more affected by the US economy than the slowdown in China. Meanwhile, the US dollar is benefiting from coronavirus fears due to its safe haven status.

The negative side continues

Given the above assessment, it seems unlikely that the Euro will start to rise any time soon. In fact, there appears to be a greater potential for further downside. It will take a continuous improvement in German and Eurozone data to see any real move higher in the Euro and it looks like it is a bit far from happening now.

Levels to watch

“The trend is your friend” EUR/USD is trading below the 50, 100 and 200 SMA, with strong bearish momentum.
Immediate support can be observed at today's low of $1.0828 before EUR/USD heads towards $1.05. On the flip side, resistance can be seen at 1.0870 $ (trend line resistance) ahead of $1.0925 (trend line resistance and Feb 11 high).

Why is the euro declining and how long will it continue its downward trend?


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