Euro to Decline as Market Considers Further Easing

Euro to Decline as Market Considers Further Easing
June 6, 2016

 
As the date of Brexit referendum approaches, as expected, the volatility in the Pound based currency pairs is increasing considerably. The volatility is seen at its highest in the EURGBP pair as both the currencies are directly affected by the outcome of the referendum. As the market unwound some of the Brexit premiums, the Pound claimed a portion of the lost territory in the past few days. The EURGBP touched a low of 0.75647in the last week of May. However, the Euro strengthened once again against the Pound last week. On Friday, the EURGBP pair closed at 0.78207. Will the Euro continue to rise further against the Pound? A firm answer to this query is possible only if we analyze the reason for the Euro’s rise.

The President of the European Central Bank, Mario Draghi, stated last week that most of the monetary easing measures announced in the March meeting are yet to be implemented. This includes the purchase of the investment grade Euro-denominated bonds issued by non-bank entities having their registered premises in the Euro area.

Beginning June 2016, the ECB will also issue a new series of four targeted longer-term refinancing operations (TLTRO II) with a four year maturity period. Draghi also stated that the ECB is prepared to take the interest rate in to the negative territory, if required. Such a stance is expected to weaken the Euro further.

Finally, most analysts believe that the EURGBP soared, not because of any kind of inherent strength in the Euro but because of the weakness in the US dollar. It is a well-known fact that the Euro shares an inverse relationship with the US dollar. Thus, only a weakness in the US dollar has strengthened the Euro. On the other hand, the UK’s manufacturing PMI reading for May stood at 50.1 and exceeded the analysts’ estimates of 49.6. The positive data are expected to strengthen the Pound. Considering these details, we can expect a downtrend in the EURGBP to begin soon.

The RSI had fallen below the reading of 50 in April, after remaining above for a period of about six months. Thus, we can consider the crossover as a firm reversal in trend. The EURGBP pair also moves within the declining channel as shown in the image below. Thus, we can expect the EURGBP to fall further in the days to come.

EURGBP - Technical Analysis - 6th June 2016

A Forex trader, under these circumstances, should go short at 0.7850 levels. The stop loss order for the short entry should be placed at 0.7990. The take profit order should be placed at 0.7580 or higher.

A binary trader can make money from the decline by picking up a one touch put option from a suitable broker. As long as the expiry period is in the first week of July and the strike price is above 0.7600, there is a good chance of finishing the trade ‘in the money’.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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