Where Next for the Euro?

Euro Rises Despite Worsening Outlook

Last week saw some of the strongest gains in recent weeks for the EURUSD with the pair testing key psychological resistance at 1.300 intraday before closing the week in touching distance at 1.2933.

So does this mark a change in direction for the Euro or have recent gains come simply from a brief surge in risk appetite and the unwinding of the dollar index as it takes a respite from its recent strong gains?

Clearly the fundamental picture for the Euro is yet to pick up. Most recent figures for the current account figures show the deficit increasing to -€5.8 from the previous readings of €5.6 billion Euros. Similarly construction output figures have also disappointed registering -1.0% compared to the previous reading of 0.3%.

While it takes more than just one poor economic report to dictate the longer term direction of a currency it will equally take more than one member state to prop up its fortunes. Germany’s contribution to the Euro zone figures maybe strong but it is unfeasible that one member state can continue to prop up the remaining 15.

However the Euro is not seeing ‘just one poor’ economic report but rather a stream of consistently weak economic figures. These are weighing heavily on the European Central Banks ability to move interest rates and deal with the prospect of Inflation/ Deflation. Couple this with the increasingly negative news flow from the member states and the foundations on which the Euro is built start to look very shaky.

Last week saw the downgrade of Portugal’s Sovereign debt rating by credit ratings agency Moody’s from Aa2 to A1. This has been quickly followed by the downgrade of Ireland’s debt rating by one notch to Aa2. Add these to the already downgraded ratings of Spain and Greece and all is not looking rosy in Euro land.

For anyone thinking that things cannot get worse, attention is next likely to turn to  Italy. The kicking boot of Europe will be the next under the scrutiny of the credit rating agencies and all bets are off as to how far its downgrade will extend. Even ‘peripheral’ European states are starting to creek. Talks ended this weekend with Hungary following a failure to reconcile its budget plan. The country will not have access to the remaining Euro credit line which does not bode well for it economic future.

So against this backdrop last weeks gains look little more than a blip. A small bounce on the back of increasing global risk appetite. Maybe the psychologists are right and a bit of good weather helps us shift our focus to the glass being half full rather than half empty.

However small blips do not make convincing trends. 1.31-32 could well prove the limit of any recent short enthusiasm for the currency. Ultimately jumping aboard the short term recovery is increasingly risky. Sidestepping this bus and buying a pass for the long term trend will probably prove not only more comfortable but a more profitable ride.