The EUR/USD Effect: It Ain't An April Fool's Joke

There are three factors that have really started to influence the EUR/USD pair: France’s lockdown situation can only deepen economic woes, investors have lowered their expectations, and the euro is going to be printed into oblivion.

In the face of mounting EUR/USD and USDX pressure, what tricks will gold come up with? Is the yellow metal up to the challenge?

As you well know (if you’ve been reading the analyses), we’ve covered the subject of the EUR/USD pair quite extensively in the Gold Trading Alerts. The world’s most traded currency pair is extremely important to consider, as it accounts for nearly 58% of the movement in the USD Index.

Anytime that Europe’s economy underperforms that of the U.S. (which is what it’s currently doing), it’s a negative for the euro and bonus points for the dollar. Because the precious metals have a strong negative correlation with the USD Index, a rise in the dollar in the very near future will further serve as downward pressure on the precious metals. Yep, we’re looking at you, gold.

As the screams of hope attempt to drown out the whispers of reality, on Mar.31, the EUR/USD and the PMs enjoyed a short-term reprieve. However, with fundamental weight continuously being added to the EUR/USD’s barbell, the currency pair’s demise alongside the USD Index’s rise will likely elongate the PMs’ downside.

Let’s have a look at the three factors that are currently weighing on the EUR/USD:

1. France in Lockdown = France in Trouble

On Feb. 17, I highlighted that The European Commission’s Winter 2021 Economic Forecast (released on Feb. 11) predicted that the Eurozone GDP growth (3.8%) would be headlined by France’s outperformance in 2021.

I wrote:

The report forecasts that France (the yellow box below) will deliver 5.5% GDP growth in 2021. With ambitious being an understatement, it was less than two weeks ago (Feb. 4) that IHS Markit’s Eurozone Productivity PMI fell for a third-straight month (to 47.4 in January) and declined at its fastest pace since June. More importantly though, the report cited France and Italy’s service sectors as the main weak spots.

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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Erikas Ivan 1 week ago Member's comment

Thank you for helping me better understand the precious metal market recently. Your perception on precious metals just shows how experienced you're in this field, unlike permabulls that only rely on headlines.