The Euro fell again on Monday after details about the EU-US trade deal were announced. Eurozone products now face a 15% tariff, alongside strong EU investment pledges and American purchases. The Euro dropped 120 pips, marking its worst day in months, while the US Dollar gained strength from positive US economic data. The new trade agreement between the EU and US did not help the Euro, which stayed around 1.1650 before the US market opened. The leaders of the European Commission and the US signed the deal, which cut tariffs from an initially promised 30% to 15%. In return, the Eurozone committed EUR 600 billion to invest and agreed to buy more gas and military goods from the US.

Impact of US Economic Data

US Durable Goods Orders showed a decline, but the drop was less severe than expected, which helped support the Dollar. In addition, a decrease in Initial Jobless Claims highlighted a strong job market. This situation strengthens the Federal Reserve’s current policy, suggesting no immediate interest rate changes. The EUR/USD pair fell below the key level of 1.1700, confirming a downtrend. Negative technical indicators pushed the pair lower. To break this trend, it would need to rise above 1.1710, focusing on higher intraday and previous highs from July. Given the confirmed downtrend, traders might consider buying put options on the EUR/USD. Choosing strike prices below the breached 1.1700 level could take advantage of the ongoing downward momentum, aligning with the negative technical signals.

Diverging Monetary Policies

The Euro’s fundamental weakness is worsened by differing monetary policies. The U.S. Federal Reserve’s key interest rate is 5.25-5.50%, while the European Central Bank’s rate is lower at 4.50%. This significant gap makes U.S. dollar assets more appealing, attracting investments away from the Euro. Strong U.S. job market data reinforces the stance against immediate interest rate changes. Recent economic activity backs this up. The HCOB Eurozone Composite PMI for November 2023 came in at 47.6, indicating a contraction. On the other hand, the U.S. ISM Services PMI was at 52.7, showing growth in its largest economic sector. This economic divergence supports the Dollar’s strength beyond the immediate effects of the trade deal. Historically, similar policy divergences, such as those from 2014-2016, have led to prolonged declines in this currency pair. Recent reports from the CFTC show that large traders are increasing their short positions on the Euro, indicating a general market sentiment. Therefore, we see any bounce back toward the 1.1710 resistance as a chance to initiate or add to bearish positions. Create your live VT Markets account and start trading now.

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