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In the 2 weeks that I have been away, there have been dramatic moves in the currency market. Not only did the US dollar carve out a bottom, but the greenback’s recovery has been impressive. In less 1 month, the EUR/USD has plunged 1000 pips, which is a drop of more than 6 percent. The psychologically level of 1.50 was easily broken and now, the currency pair is eyeing 1.45.

The Euro continues to get killed with the currency falling to a fresh 5 month low against the US dollar today. Although the primary catalyst has been dollar strength, growing problems in the Eurozone has intensified the selling pressure. Good news is coming out of the US more often than in the past while bad news continues to pour out of the Eurozone. Therefore it is no surprise that the strong Euro is finally catching up to the region’s economy. The Eurozone could not have remained immune to the US slowdown for much longer.

5 forces driving the EUR/USD lower and with no respite in sight for any of these trends, the currency pair should be headed for 1.45. These 5 factors are oil prices, eurozone and US economic data, market sentiment and the chances of a rate hike by the Federal Reserve before the end of the year.

Let’s take a look at these forces in further detail:

5 Forces Driving the EUR/USD Lower

1. Oil Prices - Since July, oil prices have fallen more than 20 percent. As the primary drag on global growth, the sharp correction will provide strong stimulus for the global economy. $100 a barrel oil prices is exactly what the world needs to turn growth around and the drop in oil prices over the past month pushes us in the rights direction. Not only will this help to lower inflation expectations, but it will also drive down gasoline prices. Central bank officials are hesitant about believing that the drop in oil is real and here to stay, but once they see inflation start to ease (which will take 2 to 3 months), they will loosen the noose on monetary policy.

2. US Data - Although today’s consumer price data contrasts with the move in oil prices, the fastest pace of consumer price growth in 17 years is nonetheless dollar bullish. Inflation was a bigger problem than most people expected last month, but at the same time, the drop in oil prices provides hope for the future.

3. Eurozone Data - The Eurozone economy on the other hand is getting worse and still has a ways to go before it hits a bottom and begins to recover. This morning, we learned that for the first time in more than 10 years, the Eurozone economy contracted. The economic storm that has been brewing around the world has hit Germany hard. I expect further misses in Eurozone data in the coming months.

4. Fed Fund Futures are pricing in a 34 percent chance that US interest rates will be increased before the end of the year. As US economic data continues to improve, I expect those expectations to rise. Although I think that a rate hike will not come until 2009, rate cuts are definitely out of the picture.

5. Market Sentiment - Currency traders have become extremely dollar bullish. The FX market is very trending and for that reason, unless there is a big surprise, the dollar rally could continue for much longer than most people would expect.