Opinion

What led to the surge of the euro to a new level?

Dr. Gaurav Nagpal | October 23, 2020 01:49 PM

NEW DELHI: EUR/USD is one of the seven currency pairs that account for the bulk of the global forex market. Being a major reserve currency of nineteen nations, the euro is a prime currency and can control single-handedly the tides of the market. Usually in an economy, the currency strengthens when the economy is rising faster than inflation, in simple terms, there is a growth in GDP. Over the past few months, the entire world has been affected by the coronavirus pandemic including entire Europe. Despite this, the euro has surged to newer levels in July and is maintaining its position well there for the past three months. The recent strength of the EURUSD is attributed to a few factors.

First, it is a weakness of the US Dollar itself. The Fed cut rates and traders are expecting that it will cut those rates even further in the nearest future. On the other hand, ECB (European Commercial Bank) is doing nothing with its view that the stimulus to fight the virus should be fiscal rather than a monetary one.

 

Moreover, according to some traders, investors from Wall Street are taking profits, selling stocks, and at the same time, planning to move part of their capital outside of the US. In addition to this, some experts say that the rising euro has to do with the reverse of the carry trades. During happy times, traders often engage in the carry trades, by buying currencies with higher rates (usually the emerging market currencies) and selling those with lower rates (i.e., euro in this case). Now, in times of uncertainty, traders want their money back and they are simply closing those trades and buying back the euro.

Furthermore, a technical reason could be added here. In the second week of May 2020, EURUSD managed to break two major, long-term down trend line, which triggered some pending orders, accelerating the original movement.

Off late, the European Union heads of state and government attempted to reach an agreement on a roughly 1.85 trillion euro ($2.1 trillion) package, which includes 750 billion Euros in funds aimed at aiding the recovery of the region’s worst-hit economies. The ECB also exceeded expectations of the investors by increasing the size of its pandemic emergency purchase program, known as PEPP, to 1.35 trillion ($1.54 trillion) from €750 billion. The ECB has also pledged to continue reinvesting maturing principal payments at least through the end of 2022.

There is also expected to be a comeback of inflation, which is currently at low levels, in the euro zone in 2021. Currently, it is low due to a decline in productivity and an increase in production costs. The increase in inflation in the next year would lead to an increase in the long term interest rates and support the euro against the dollar.

All these factors and several more are responsible for the strengthening of the Euro against the US Dollar. The nearest resistance for EUR/USD is located at the 20 EMA (Exponential Moving Average) at 1.184. If it manages to settle above this resistance level, it will head towards the next resistance level at 1.191.

 

Dr. Gaurav Nagpal
Dr. Gaurav Nagpal is an Assistant Professor of Management at BITS Pilani. He is an alumnus of IIFT Delhi and IIM Calcutta and carries 12 years of experience in the industry. His last industry assignment was as Associate Director at Grofers. He loves writing articles on the industry and business perspectives, as well as on broader socio-economic issues,

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