The EUR/USD exchange rate reached the lowest level in almost three years, falling towards the levels last observed in April 2017. One of the main reasons seems to be the increase in concerns about economic growth, which in turn increases the chances of monetary easing by the European Central Bank.
This week, the single currency seems to be the weakest among the world's major currencies, losing around 1 percent. The key macroeconomic data that could worsen sentiment towards the euro could be industrial production data, which were the worst in almost four years. What's more, today's data on Germany's GDP, i.e. the largest economy in the euro area, pointed to stagnation in the fourth quarter of 2019. The data shows that household consumption and government spending have slowed considerably and investment has fallen. Exports also fell and imports increased, suggesting that trade had a negative impact on the economy. It is therefore likely that we could see Germany's GDP shrinking again in the first quarter of this year. This may not help the single currency to recover.
Hence, investors may increase their expectations regarding a further decline in the EUR/USD exchange rate on the currency options market. From the perspective of weekly options, we could observe the most bearish sentiment since September 4. This is due to the increased demand for put options relative to call options. When an investor buys a put option, he may profit if the underlying instrument's price drops. In turn, when an investor buys a call option, he may profit if the underlying instrument's price increases. The advantage of demand for put options is also visible within a month. Here the bearish sentiment is the highest for four months.
It seems that the European economy has not yet managed to get out of the last problems, and it has more to come. The central bank can do a lot, but its activities should be supported by appropriate government and fiscal policies. The ECB also emphasizes this, but while the bank may decide on a further or longer loosening of monetary policy at one meeting, governments at one meeting will not introduce much-needed reforms to Europe.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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