EUR/USD has been in a long term downtrend from many months now. EUR/USD downtrend started in the month of May last year. EUR/USD reached 1.38822 level where it found strong resistance when ECB intervened strongly and made sure that EUR/USD does not appreciate above this level. EUR/USD has been falling since then continuously. Right now EUR/USD is trading at 1.18058 price level. Making EUR/USD drop is one of the main strategies being pursued by ECB in order to revive the European economy.
You can see EUR/USD pretty strong on the weekly chart. There are fundamentals reasons why EUR/USD is falling down. “Expectations that the ECB will start quantitative easing are strengthening firmly. Some people say it could fall to around $1.15,” said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo. Data on Wednesday showed consumer prices in the euro zone fell in December from a year earlier, marking the first annual decline since 2009. That only cemented market expectations the ECB will launch a bond buying program at its policy meeting on Jan. 22.
US economy is showing strong recovery which is making USD strong and bullish. Investors are dumping EURO and shifting to USD now. Central banks and reserve managers are breaking from past practice by showing little appetite to add euros as the currency tumbles. The total amount of reserves held in euros fell 8.1 percent in the third quarter, more than the currency’s 7.8 percent decline in that period against the dollar, according to the most recent figures from the International Monetary Fund. The last two times the euro depreciated 7 percent or more in a quarter — in 2011 and 2010 — holdings declined far less. The data suggest reserve managers are passing up the chance to buy euros while they’re cheap, removing a key pillar of support. In August, European Central Bank President Mario Draghi cited the drop in other central banks’ euro holdings as a factor that would help weaken the exchange rate and ultimately boost the region’s faltering economy.
“With oil prices falling … to new lows and underlying price pressures still limited by weak economic activity, it looks ever more likely that the eurozone will see several months of deflation,” said Howard Archer, the chief European economist at IHS in London. It’s widely expected that the European Central Bank will swoop in later this month with a program of quantitative easing — massive purchases of government bonds — to try to stimulate the economy and prop up prices.
With deflation people will start hoarding money. Consumer spending will lessen as people will hoard money in the expectation that prices will go down further. So they will buy less hoping to buy later in the future at a lower price. Reduced consumer spending will hurt industrial production. It is expected that ECB will start its QE program massively soon to reduce the deflationary pressures on the economy.