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Euro Weakens as Markets Reconsider Debt Prospects

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February 2, 2014 By: , No Comments

European-Cental-Bank

Forex markets seem to be second guessing some of the dominant market trends that were seen into the final months of last year,with the Euro seeing a broad sell-off (against nearly all of its major trading counterparts), and the US Dollar recovering some lost ground.  Toward the end of 2013, the Euro managed to scale to new highs just below 1.40, as delayed tapering programs at the US Federal Reserve sent bullish signals for those invested in currency pairs like the EUR/USD and GBP/USD.  These general expectations were reversed into the final weeks of the year, however, as the Fed finally committed to reductions in quantitative easing stimulus.  But, at this stage, it appears that this is all old news — and that investors are ready to once again step in and start buying Dollars at these bargain levels.

Most of the market pressure has been expressed through the EUR/USD, which is now trading nearly four big-figures lower.  So, why exactly has the Euro been taking such a beating?  One explanation can be seen in the fact that central bank commentary from the ECB has highlighted areas of economic weakness and brought the market’s attention back to the fact that several key nations in the Eurozone still face immense debt headwinds that will continue to weigh on growth prospects well into 2014.  Interest rates in the Eurozone are already at historic lows, so there is little the ECB can do at this stage to cushion the blow if further weakness is seen.  This makes the fate of the Euro start to look vulnerable in the coming months.

The Week Ahead in Forex Markets:  Watch the Australian Dollar

In the week ahead, forex traders will be focusing some of their attention on the commodity currencies (and the Australian Dollar, in particular) as key economic data out of China will give markets an indication of the level of demand that is likely to be seen in emerging markets.  China is Australia’s biggest trading partner, so the fate of the AUD is highly dependant on the level of strength or weakness that is seen in emerging Asia.

The Australian Dollar was one of the biggest losers in 2013, so if we do see some positive surprises out of China, we will likely see some investors start to buy the AUD at these lower levels.  For these reasons, it makes sense to start watching some of the peripheral currencies in the week ahead, as this is where a good deal of volatility (and potential for trading gains) will likely be seen.  This does not mean that the US Dollar will not be the main driver of sentiment but for those using shorter term time perspectives, there is likely to be some good trading opportunities in the AUD in coming sessions.  Negative data out of China could bring a renewed sell-off in the Aussie.

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