Investing.com – The euro is having a relatively good July compared to the US dollar, but BCA Research foresees tough times ahead for the eurozone and advises investors to sell the common currency.
At 08:50 ET (12:50 GMT), trading at 1.0818, down 0.4% on the day but up about 1% over the past month.
Despite these gains for the EUR/USD pair, BCA Research suggests that investors should take a defensive stance on European assets as they see the likelihood of a recession ahead.
The country cut key interest rates in early June, ahead of the US Federal Reserve and the Bank of England, and is expected to ease monetary policy twice more this year.
However, the two additional cuts this year will be too little too late, analysts at the Canadian investment research firm said in a July 29 note.
“The eurozone is heading for a recession. It has too many vulnerabilities. Therefore, a shock from the US or China will easily lead to a contraction in output and a rise in unemployment,” said BCA Research.
The rate cuts priced in by investors this year are insufficient to prevent a recession, BCA said, because in the past capital spending and gross domestic product continued to decline long after central banks started cutting rates.
“Europe already shows domestic vulnerabilities. The private sector is spending an increasing percentage of its income on servicing debt, while construction activity declines, bankruptcies increase and the labor market stagnates,” BCA said.
Any foreign shock could push this fragile economy into recession, and the foreign risks are numerous: the US is nearing a recession, the Chinese economy is slowing, and emerging markets are weak.
Investors should “take a defensive stance; prefer bonds to equities and defensive names to cyclical names. Sell EUR/USD,” BCA said, seeing the currency pair falling to parity.
