EUR/USD: a few arguments for a decline of the pair

EUR/USD traded briefly above 1.19 in the wake of the this month's non-farm payrolls report. The most important currency pair on the currency chart bounced back below 1.18 - is the rise sustainable?

A day before the most important central bank meeting after the end of summer, the EUR/USD failed to maintain its bullish bias. The pair hit 1.19 after the September non-farm payrolls report revealed that the U.S. economy struggled to create new jobs last month.

But, the upward movement was short-lived. The EUR/USD does indeed look vulnerable for at least the following reasons.

Eurozone economy lags

First, there is a considerable gap between the Eurozone's GDP (gross domestic product) and the U.S. figures. In the second quarter of the year, U.S. GDP was only 2 percent below the pre-pandemic trend. In contrast, Eurozone GDP is 6.3% below trend, a difference that should weigh on any attempt to raise the EUR/USD exchange rate.

German Federal Elections

At the end of this month, the German federal elections present a risk to the common currency. The Merkel era is ending and the political parties are in a tight race. Merkel brought stability to Europe because she was seen as a pillar of European integration. A change in leadership may take time and is therefore a risk for euro supporters.

European Central Bank

The European Central Bank (ECB) makes its monetary policy decision and gives its press conference today (Friday). The risk is that the central bank will issue a hawkish statement, hinting at tapering asset purchases before the Fed.

This alone is one of the reasons for the recent rise in the EUR/USD, but traders should be aware that the ECB has an easier time explaining rising inflation than the Fed. In Europe, inflation is mainly due to soaring energy prices, which are easier to explain as transitory.

Global economy slows

Perhaps the most important reason for the EUR/USD's decline is the global economy, as it is slowing. We have already had a bad jobs report in the U.S. and Asian economies are suffering from a resurgence of new virus infections. The risk to the global economy is on the downside, which could trigger a flight to safety for the U.S. dollar.