Investing.com – The euro performed relatively well in July when measured against the U.S. dollar, but BCA Research sees tough times ahead for the euro zone and advises investors to sell the single currency.
At 08:50 ET (12:50 GMT), the pound was trading at 1.0818, down 0.4% on the day but up about 1% over the past month.
Despite these gains in the EUR/USD pair, BCA Research suggests that investors should take a defensive stance regarding European assets as it sees the possibility of a recession ahead.
The central bank cut its benchmark interest rate 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 that are priced in will be too little, too late, analysts at the Canadian investment research firm said in a July 29 note.
“The eurozone is heading for recession,” said BCA Research. “It has multiple vulnerabilities. Any shock from the US or China could easily lead to a contraction in output and a rise in unemployment.”
The US Federal Reserve said the interest rate cuts priced in by investors by the European Central Bank this year were not enough to avoid a recession, as capital spending and GDP have continued to decline in the past long after central banks began cutting interest rates.
“Europe is already showing domestic weaknesses,” the agency added. “The private sector is spending an increasing share of its income on debt servicing, construction activity is declining, bankruptcies are increasing, and the labor market is stagnant.”
Any external shock could tip this fragile economy into recession, and external risks abound—the United States is nearing recession, China’s economy is slowing, and emerging markets are weak.
The US Federal Reserve said investors “should be defensive; prefer bonds over stocks and defensive names over cyclical names. Sell EUR/USD” as the pair fell to parity.
