I have taken out a short position on the EUR/USD as the outlook for Europe is declining as the economic data shows the continent is slowing down.
Key factors considered when placing trades include the strength of a country’s economic moat.
This refers to a comparison of interest rates, inflation, GDP, services, manufacturing, and jobless numbers between the two countries.
When we examine the data for Europe in the table below and compare these figures to the United States of America.
Europe
- GDP Growth: 0%
- Inflation: 2.3%
- Interest Rate: 2.65%
- Manufacturing: 48.7
- Services PMI: 50.4
- Consumer Confidence: -14.5
- Retail Sales: -0.3%
United States
- GDP Growth: 2.3%
- Inflation: 2.8%
- Interest Rate: 4.5%
- Manufacturing: 49.3
- Services PMI: 54.3
- Consumer Confidence: 57.9
- Retail Sales: 0.2%
In the table above we can see the GDP Growth for Europe is 0%. We can see inflation is 2.3% and the interest rate at 2.65%. Manufacturing increased to 48.7 and Services PMI decreased to 50.4 Consumer confidence fell to -14.5 and retail sales dropped by -0.3%
In contrast the United States of America’s GDP growth is 2.3%, inflation 2.8% and the interest rate 4.5%. Manufacturing decreased from 52.7 to 49.3 and Services PMI increased to 54.3 Consumer confidence increased to 57.9 and retail sales increased by 0.2%.
The Eurozone has also increased spending on defense because of the Ukraine war, this increases debt.
Interest Rate vs Inflation
While the interest rate is lower in Europe than the United States of America and Inflation is around 2%. This means that Europe could be lowering the interest rate as the ECB aims for an inflation rate of around 2%. If Inflation is higher central banks move to lower inflation by raising the interest rate. When inflation moves lower, central banks decrease interest rates.
FX Pairs move accordingly if the interest rate for Europe are lowered then we could see the Euro go down against the USD.
Regulation
Europe has a lot of financial regulation. While that is a good thing, too many regulations stifle an economy, we can see that the United States of America are removing regulations and while we will not see the results now, in a few months we will see if GDP, Services PMI and Manufacturing increase. This is a complex issue to measure so only time will tell.
I will maintain the short position on the EUR/USD until the economic data for Europe improves or if the United States Federal Reserve moves to lower interest rates as inflation subsides.
To determine the likelihood of further drops in interest rates. It will be necessary to monitor the data from the Central banks like the ECB who meet every six weeks and the Fed who meet eight times per year, to see what their projections are for the interest rates within their monetary policy for their countries.
Disclaimer: I am not providing financial advice in this blog post.
If you have any questions or thoughts please leave a comment below.
