The Dollar Hits an 18 High Against the Euro25.11.2021by Jesus Guzman
The year 2020 and the first part of 2021 saw a strong Euro being fuelled by a weakening USD. However, the currency pair has been declining over the past 18 months by 8.40% and has lost nearly all previous longer-term gains. The EUR/USD is the most traded currency pair globally and holds both first and second place amongst the largest currency reserves.
So, the question remains as to why the pair has come under so much strain and will it continue in the longer term?
The Dollar Hits New Highs
The price movement of the asset is not only related to the Euro’s devaluation but equally influenced by the Dollar which has seen strong bullish movements. The currency has been supported by three main factors;
- Monetary Policy
The three elements are known to be strongly correlated with each other and can trigger reactions. Inflation has been the latest element to support the price of the pair. The inflation was confirmed on the 10th of November as 6.2%. It should be noted that inflation has now reached more than double the Federal Reserve’s original prediction and the highest in more than 30 years. The cause of the inflation is mainly energy cost which increased by 30%.
As inflation increases, there is a higher level of pressure on the Federal Open Market Committee to react by altering the monetary policy to keep the inflation level in check. In turn, a more hawkish monetary policy can increase the demand for the currency. Currently, the Central Regulator has confirmed they will gradually lower the Quantitative Easing Program which lowers the supply within the market. However, chances of interest rate increases remain low for this year as the Federal Reserve advises that inflation is likely to stabilise in 2022.
Even though the monetary policy has supported the Dollar so far, there is still the danger of the Regulator taking a dovish stance. So far, the regulator has not taken strong hawkish actions and has taken a sit back and wait for stance. The Federal Reserve still predict inflation to decline next year, but where does this leave the monetary policy and will this negatively affect the US Dollar?
In addition to the Inflation rate and monetary policy, the US Dollar has also been influenced by the employment figures which continue to improve. The Unemployment Rate declined for a fourth consecutive month to 4.8% from 5.2%. In addition to this number of newly employed individuals increased by over 531,000 within a single month.
The NFP figure is known to be one of the most volatile events throughout each month. Volatility means the price movement both increases and decreases at speed; beginner traders should keep this in mind when trading trends. But the three elements; Inflation, Employment and Monetary Policy, have contributed to the US Dollar’s longer-term bullish trend.
The European Crisis
Investors are cautious about investing in a currency that is not backed by a stable economy and political system. Within the many European States, this is largely deteriorating, specifically in Austria and Netherlands. Both the public and large freedom parties have strongly reacted and taken part in demonstrations, increasing fears of political instability. So, what is the issue?
Currently, the number of Covid-19 cases have risen in Europe which brings many individual states at a high risk of economic restrictions or possibly even lockdowns. The European economies have struggled to recover from the first lengthy lockdown in 2020 and have never fully removed restrictions. This has resulted in a slow recovery which can be seen when you compare figures with other regions such as the UK and US. The issue now is how long will the individual countries remain in lockdown and whether further countries will follow.
As part of the trader’s analysis, sentiment is always evaluated. One of the issues now with the Euro is that the sentiment is extremely low due to the number of restrictions and lockdowns. In addition to this, the market is also focused on the European Central Bank which has taken a far more dovish stance than other western regulators.
The price movement over the past 24 hours continues to move in accordance with the Elliot Wave Theories. The price continues to break lower with smaller corrective waves resulting in lower price lows and price highs. When looking at the US Dollar and Euro Index individually we can see the price action is being seen across the market. Currently, the main concern for traders is whether the price movement will reverse or if the 18-month high is oversold in the short term.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.