Its more than six years since the 2008 global financial crisis. While the United States has increased the recovery process, the Euro area is yet to fully achieve the set growth targets. This is a clear demonstration of the increased slowdown in the Eurozone economies. It is also a clear demonstration of how bad the decisions by the Eurozone decision makers are. In December, Mario Draghi, the ECB chair announced an increased stimulus in an attempt to revive growth and increase the level of inflation. In the 3Q of this year, the Eurozone economy grew by a minor 0.3% while the United States grew by 2%. In November, the inflation rate grew at a meagre 0.2% despite the massive measures put in place by ECB. These measures include the massive Quantitative Easing program. Quantitative Easing (QE) is simply an asset purchase program by the central government. It can also be viewed as a way of printing money to spur growth in the economy. Despite these measures, the Euro has weakened against the dollar by 12% this year.
Sadly, in 2016, the trend will continue as the Eurozone region braces for more of the same challenges. First, while Mario Draghi has stated that the ECB is comfortable with the current rate of growth, QE or the asset purchase program will continue until September 2016. There is also a likely possibility that the stimulus program will continue until 2017 based on the growth rate achieved. This was further seen by the December’s decision by ECB to increase stimulus. The good thing about this is that recovery is now being experienced in some part of the Eurozone such as Germany. In 2016, the following risks will pose a major challenge to the Euro.
China and the other emerging markets have experienced slow growth in 2015 which was partly attributed to the strengthening dollar. The Eurozone area is mostly an exporting zone. Therefore, continued weakening in the emerging markets will pose a major threat to its recovery.
Geopolitical issues especially in the Middle East will be a major threat to the recovery of the Eurozone. Last month, France was hit by ISIS which led to the deaths of more than 100 people. Also, in April this year, there was also an attack in a French magazine publisher. It is expected that more strikes and suicide bombs will continue in France and other countries in the Eurozone. At the same time, the war in Syria has led to increased activities in Eurozone regarding the refugees issue. Millions of people from Syria escaping war in their mother land are escaping to European and American countries. Germany has become the leading destination of these people. In 2016, these geopolitical issues will continue.
The continued silence in Greece should not be interpreted as stability. Greece continues to face challenges in more magnitude than what was witnessed earlier this year. In fact, according to Standards and Poors (S&P), Greece is at risk of a default in 2016 unless serious measures are taken. These measures include serious structural reforms in their economy. Earlier this year, the threat of a Grexit was so severe that the Euro lost most ground during that period than in any other period during the year.
Technically, there’s only 2 important support levels in EUR/USD – the 12 year low of 1.0459 and parity. If the recent low is broken, it should kick off a quick slide to 1.0000. Taking a look at the longer term chart of the currency, a major top formation can be clearly seen. When EUR/USD broke its 2010 low of 1.1877, there was a quick drop to the 61.8% Fibonacci retracement of the 2000 to 2008 rally. This Fib level at 1.1215 is now resistance and a strong close above this level is needed to reverse the negative sentiment in the currency.