Euro Continues its Steady Drop
Forex markets continued with many of the central themes that were seen last week, with the Euro posting further declines after failing just south of the 1.40 mark. It is looking more and more clear that the Euro has been overvalued for some time and that key counterparts like the US Dollar have not been trading in line with economic fundamentals. It should be remembered that the sovereign debt crisis that marred the Eurozone has not been completely resolved and there is little reason to believe that the region is completely free from long term complications.
When we look at the economic data coming out of the Eurozone, there is little reason for excitement. Comparative growth rates (in terms of GDP) still favor the US and these advantages extend into the employment sphere at well. For the region as a whole, unemployment in the Eurozone still stands at an extremely elevated 11.3%. This is nearly double what is seen in the US and when we compare these data trends to what is actually happening in prices, forex markets start to look much more confusing. For most of this year, the EUR/USD has been rallying but the trading activity in the last few weeks suggests that traders might be basing positions now more on fundamentals rather than in momentum and breakout potential.
The Week Ahead in Forex Markets: Don’t Forget the ECB
In the week ahead, forex traders will look for new clues that the European Central Bank is truly willing to start adding to stimulus programs as a means for generating favorable activity in the region’s economy. To be sure, there is a good deal of difference when we look at the economic performances seen in individual countries. More strength is seen in areas like Germany and Austria, where unemployment rates are still relatively low. In contrast, areas like Greece, Spain, and Portugal have economic problems that are much more pronounced.
The disjointed nature of the individual economic performances will mean that the ECB will probably be forced to add more stimulus to the economy. This is a negative for the Euro and further mentions in this direction should bring additional selling pressure to the EUR/USD currency pair. BUilding bearish momentum in the EUR/USD will probably put pressure on the GBP/USD as well, as these pairs tend to have a high positive correlation.
In the week ahead, sentiment in the Euro is likely to continue to be the main story as there is no significant data to be released out of the US during the period. We will probably see short term traders try to buy into the Euro while it is trading at these lower levels. But this is a dangerous practice as it will take a good deal of position squaring in order to shake out all of the bearish traders from the market.