Will the Euro’s Slide Against the Dollar Continue?

Ellen Griswold: “Clark, you’re driving on the wrong side of the road!”
Clark Griswold: “I realize that honey. I’m also on the wrong side of the car.”
European Vacation, 1985

The Euro Dollar has been in a steady decline for the past 6 months. At the end of June, the currency pair was trading at $1.37, and has since dropped 11% to $1.22 as of Friday’s close.

The 5 year low is $1.19, and if it drops below that it will hit a level not seen in almost 9 years.

The U.S. economy is humming, and the final reading on 3rd quarter GDP was a robust 5% increase representing it’s largest quarterly increase since 2003. Gas prices are down, consumer spending is up, and unemployment numbers continue to improve. The Fed has stopped QE, and although it has stated it will be “patient” with its stance on raising rates, most expect the first move to happen mid-next year.

On the other hand, growth in Europe has continued to be disappointing, and the ECB has stated that it is ready to provide more stimulus to encourage investment and growth. And as of today, there’s trouble in Greece again. “European shares and periphery euro zone bonds tumbled on Monday after the Greek parliament rejected the government’s presidential candidate, setting the stage for an election that the anti-EU/IMF bailout rival Syriza could win.” – Reuters.

There definitely does not seem to be any momentum to suggest a rebound in the Euro Dollar in Q1. Or, is there?

Jens Weidmann, head of Germany’s Bundesbank, has recently suggested that things aren’t as dire in Europe as most people think and that growth could be better than expected for next year. He’s not on board for European stimulus, given the stimulus now being provided by low Oil prices. “An economic stimulus program has been handed to us, why should we add to that with monetary policy?” said Weidmann, adding that pressure from financial markets should not determine the ECB’s moves on buying up sovereign bonds.

We thought it would be interesting to run a quick historical study to find times where the EUR/USD has traded in a similar fashion historically and to see how the market typically responds. We took a look at the current 6 month price trend, and found 21 similar historical instances in the EUR/USD going back to 1998.

The Euro rebounds 67% of the time, and the average return is close to 2%. (Projection below)

We also wanted to see when the EUR/USD AND the 10 Year Treasury have both traded in a similar fashion over 6 months, and how the EUR/USD responds during these times historically. We found two similar instances, from 2000 and 2005, and in both the Euro is up against the Dollar in the next 3 months.

Happy New Year!