FX.co ★ What is the euro's weakness?

Sell when everyone is buying. Recently, we've heard enough praise for the euro to start getting rid of it. On Forex, they talk about the divergence in the monetary policy of the European Central Bank and the Federal Reserve. That the US is approaching a recession, and the eurozone will be able to avoid it. All this has pushed the EURUSD quotes to the annual high, but the bulls could not strive for more. However, the euro has a vulnerable spot that few people remember.

In 2022, the regional currency hit bottom and reached parity with the US dollar due to the armed conflict in Ukraine and the related energy crisis. Since then, things have changed. Gas prices have dropped significantly, allowing the EURUSD to spread its wings. Fans of the euro are reassured by the fact that today the blue fuel reserves are filled at 59%, which is above average levels.

However, history knows at least one precedent when the consequences of an energy crisis were structural in nature and led to a prolonged weakening of the currency. This refers to the Fukushima disaster in 2011. Japan's large-scale departure from nuclear energy led to a permanent trade balance deficit and a 40% drop in the yen rate since the end of 2010.

Something similar is happening in the eurozone at present. Since September 2021, not a single positive balance of foreign trade has been recorded in the currency bloc. What used to serve the euro faithfully is now sinking it.

Eurozone trade balance dynamics

Undoubtedly, the exchange rate depends on trade and investment flows, but a sharp change in the latter is a very alarming signal. It allows Danske Bank to predict a drop in EURUSD to 1.06 and 1.03 in 6 and 12 months. At the same time, the consensus estimate of Bloomberg experts is 1.12 by the end of 2023. Optimists see the pair at the 1.2 level.

In my opinion, many bullish factors are already taken into account in the euro rate. Here, we have the ability of the currency bloc to avoid a recession and the increase in the ECB's deposit rate to 3.75%. However, the latest Bloomberg expert poll shows that the cost of borrowing will start to decline as early as October. The most likely reason for this is an economic downturn.

ECB deposit rate forecast

Weaker GDP data for the eurozone in the first quarter should further inflate fears. The economy grew by a modest 0.1%, not reaching Bloomberg experts' forecasts. At the same time, accelerating inflation in Spain and France adds fuel to the fire. The more the ECB tightens its monetary policy, the higher the risk of recession..

Thus, the euro has its own Achilles heel. And not just one. This allows for a correction in EURUSD. Especially if the Fed turns out to be a bigger hawk at the May meeting than expected.

Technically, the bears are eager to play the Anti-Turtles reversal pattern. Falling below the fair value of 1.0975, as noted earlier, will allow the shorts formed when returning below the important 1.1 level to grow.