EUR/USD: Three reasons to expect a further downfall

EUR/USD has been struggling to hold onto its gains as the ECB effect fades away and the recent upside correction seems to be nearing an end. Yohay Elam, an Analyst at FXStreet, lays out three reasons to expect the pair to dive.

Fading ECB effect

“The European Central Bank now aims for a symmetric 2% inflation target – not an upper limit at that level – but it refrained from taking bolder steps. That special ECB announcement gave a boost to the euro on Thursday, but it is fading away on Friday. Why? The ECB is still buying bonds without an intention to taper it down – contrary to the Fed. More sluggish European growth is set to keep the bank behind its American peer for the foreseeable future.”

Delta and the dollar

COVID-19 is lifting its ugly head once again, spreading fast due to the highly transmissible Delta variant. In the old continent, it means slower growth and thus a weaker euro. For the US it also means a slower recovery – yet the dollar also functions as a safe-haven currency benefiting in times of trouble. A win-win for bears.”

Yields now supporting the greenback

“How can the dollar rise while US bond yields are tumbling down? And why are Treasuries receiving so much demand? The Delta variant mentioned earlier may provide an answer to the second question – a flight to safety – but the lack of correlation has been perplexing investors. For others, the greenback's ability to defy gravity was a sign of strength. The tables have turned in bond markets, with yields rising once again. A currency that holds its high ground in times of trouble can shine when things turn in its favor – and that is what is happening now with yields and the dollar.”

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