The Euro weakened further on Monday following the release of the EU-US trade deal details. Products from the Eurozone face a 15% tariff, coupled with strong EU investment commitments and purchases from the US. The Euro dropped 120 pips, marking its worst daily performance in months, while the US Dollar gained support from US economic data.
The trade agreement between the EU and US failed to bolster the Euro, which hovered around 1.1650 before the US session opened. The European Commission President and US President signed the pact, reducing tariffs initially promised at 30% to 15%. In exchange, the Eurozone pledged EUR 600 billion in investments and increased purchases of gas and military goods from the US.
US Economic Data Impact
Despite a contraction in US Durable Goods Orders, the data was better than expected, supporting the Dollar’s position. Additionally, a decrease in US Initial Jobless Claims underlined a resilient labour market. This backdrop strengthens the Federal Reserve’s current stance, discouraging immediate interest rate changes.
The EUR/USD pair broke key support at 1.1700, confirming a bearish trend. Technical indicators were negative, pushing the pair further down. To reverse the trend, the pair would need to climb above 1.1710, shifting focus towards intraday highs and earlier highs from July.
Based on the confirmed bearish trend, we believe traders should consider buying put options on the EUR/USD. Selecting strike prices below the recently breached 1.1700 level would capitalize on further downward momentum. This strategy directly aligns with the negative technical indicators mentioned.
Monetary Policy Divergence
The fundamental weakness is amplified by diverging monetary policies, as the U.S. Federal Reserve’s key interest rate currently stands at 5.25-5.50% while the European Central Bank’s rate is lower at 4.50%. This significant rate differential makes holding U.S. dollar assets more attractive, drawing capital away from the Euro. The resilient U.S. labour market data further solidifies the current stance against immediate interest rate changes.
We see further confirmation in recent economic activity, with the HCOB Eurozone Composite PMI for November 2023 coming in at 47.6, signaling a contraction. In contrast, the U.S. ISM Services PMI registered 52.7 for the same period, indicating continued expansion in its largest economic sector. This economic divergence supports the dollar’s position beyond the trade deal’s immediate impact.
Historically, similar periods of policy divergence, like in 2014-2016, have led to sustained declines in the currency pair. Recent Commitment of Traders reports from the CFTC also show that large speculators have been increasing their net short positions on the Euro, indicating a broader market consensus. Therefore, we would view any rally towards the 1.1710 resistance level as an opportunity to initiate or add to bearish positions.
