Euro Dollar Could Reach 1.40 Once The ECB Starts Cutting Interest Rates
Recent economic data points towards a weakening of real GDP growth in the euro zone economy and a more accommodative monetary policy could be needed to prevent the region from falling into a recession. Our trading recommendation is to sell EUR/USD at the market for 300 pips in profit potential with a stop in a daily close above 1.48.
Earlier in the day, German’s Federal Statistics Office reported that Europe's largest economy contracted by 0.5 percent quarter on quarter in the April-June period. Later, the euro dollar broke below 1.46 after the IFO Survey showed that business confidence in German fell to a three year low. Despite the recent easing on energy prices the ECB remains very concerned with inflation but the recent economic data has been so bad that the Governing Council of the ECB could be pressured to review its monetary policy. In fact, traders expect the ECB to cut rates by nearly 50 bps over the next 12 months, according to overnight index swaps.
On the other hand, the next step by the Federal Reserve policy makers will be to raise interest rates, according to minutes of the Federal Open Market Committee meeting released on Tuesday. Moreover, the recent sell off in commodities, particularly in oil, should alleviate some downward pressure in the U.S. economy and we expect the Federal Reserve to increase rates by almost 75 bps in the next 12 months. Lower interest rate differentials could make the euro less attractive to foreign investors and the lower level of demand for assets denominated in euros could accelerate the losses in the EUR/USD. Our trading recommendation is to sell EUR/USD at the market for 300 pips in profit potential with a stop in a daily close above 1.48.
Written by Antonio Sousa, Chief Strategist
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