Since the beginning of 2010, the euro has been in a virtual free fall against the dollar. From the FT to Bloomberg, analysts have forecasted the euro’s eventual parity with the dollar. But are these predictions unfounded?
Just over a month ago, the euro declined to under 1.1900 against the dollar and the market seemed ready to declare parity as the next stop. However, since then the euro has bounced back over 1.2700 on bad news in the USA and perhaps a bit of optimism. While there are still serious issues in both the EU and USA, could the recent bounce off the 1.1900 level signal a stopping point for the decline? It’s very possible, at least for now.
Is the Greece sovereign debt issue as bad as feared? What’s interesting is that Greece only accounts for about 2% of the total GDP of the European Union. What if it fell off the map? Would it really have as devastating of an effect as many currency traders believe? One solution is for Greece to leave the EU and come back, but use their own currency.
However, Greece recently had a successful bond auction, which is fueling optimism for the moment. Correct or not, it seems investors aren’t too concerned about Greece collapsing within the next 26 weeks. And during periods that lack economic reports, any news can have a significant impact.
Recently, the UK has began austerity measures and Germany (roughly 20% of EU GPD) is looking very strong. In fact, the top three economies of the EU—Germany, France and the UK—that account for about 50% of total EU GDP are anchoring the ship.
So how should you trade? Some analysts believe the EUR/USD will stay just below 1.3000 for another month or two before resuming its overall bear trend toward 1.2000 or even parity. The currency is in a bit of a range right now and could go either way. A move above the huge psychological level of 1.3000 could signal a bull run upward. And a solid close under the 1.2400 level could signal the return of continued downward movement.
Perhaps the bigger issue is the weakness of the dollar, which has suddenly pulled back from months of gains. It’s weaker against most major currencies right now. The Swiss National Bank ended its campaign of strong intervention and since then the USD/CHF has plummeted from dancing around 1.1700 to the 1.0550 level currently. And the dollar has been falling against the yen.
Will the news out of the USA get better? It sure doesn’t seem so. On Wednesday, month over month core retail sales numbers will be out. The market is looking for a -0.1% number, which is a 1% improvement over the last report, but still negative.
Additionally, the FOMC meeting minutes will be released in the evening. And Thursday will be power-packed with news out the USA, including the PPI month over month and unemployment claims.
If analysts are indeed correct, look for the euro to remain around its current level for at least July and perhaps into September, before fading against the dollar later in the year.
