Euro Quakes as Investors Ponder Dollar and Pound
As anticipated, the Euro was looking distinctly shaky yesterday as traders and investors sold the currency in favour of USD positions. EUR/USD was brought down to the 1.34 level and the Euro itself burrowed to a three week low across the board as the currency was snubbed on future yield appeal. Clearly, despite the fact that most investors have to pay a stinging premium to hold their funds in the Dollar at the moment, as US Treasuries yield record lows, the view that the European Central Bank is ‘behind the curve’ is starting to hold sway. This could potentially take the EUR/USD rate down to autumn 2008 levels in the near future where, at the time, its price (in the 1.24-1.30 region) was more a reflection of fear rather than that of interest rate fundamentals.
As we keep highlighting, if it is the case that the Federal Reserve made a wise decision in its audaciously aggressive monetary and fiscal strategies to combat both its financial and growth crises last year, then the Dollar can only be expected to gather strength against the single currency as this year gathers pace. In actual fact, it looks at present that the currency is in a bit of a win-win situation (strength-wise anyhow). If, as was clear today, with Eurozone headline inflation dipping to below the 2.0% ECB ‘comfort zone’ to 1.6 per cent in November, the Europeans steepen their interest rate curve on the downside, then the Dollar can be expected to gain on rate fundamentals. In the same vein, if the US dives back into another ‘annus horribilis’ this year, but the Europeans also have to glumly admit that they are in severe trouble, they will still be behind the interest rate curve which will lead to an even more pronounced outflow from the currency into mainly Dollar ‘safe havens’.
We should, however, continue to bear several things in mind before we all start licking our lips at the prospect of upwards of 1.25 GBP/EUR again. The first is that Jean Claude Trichet (ECB President) is renowned for being an arch-hawk and as such would seemingly rather sacrifice growth to keep inflation well in check. Secondly, aggressive cuts in Europe’s base rate would likely drastically weaken the Euro which, in this environment, would lead to a very weak level against the Dollar, being Europe’s main currency of export. This scenario would certainly stoke inflation for the year ahead which we know is the worst nightmare for any European Central Banker. Thirdly, the rift between ECB Members continues to grow, with the weight of influence still concentrated in favour of hawks such as Axel Weber, Bundesbank President. These factors all together, unfortunately or not, may play together to squeeze the life out of smaller Eurozone members whilst preserving the yield appeal and value of the Euro alongside inflation expectations for the stronger members. We shall see.
Sterling benefited hugely yesterday from Euro outflows with the GBP/EUR pair pushing up towards the 1.10 level. The fact that this level has held overnight indicates a degree of buy positions being left open adding to the case for further strength today. GBP/USD on the other hand, as we anticipated yesterday morning, suffered on Dollar strength, spending most of the day between 1.45 and 1.47 before finishing well on some late session equity interest. Today can expect major trends to continue with some mid-tier European data adding to woes for the region on the German Unemployment figures front. The Pound can be expected to hold reasonably well against both the Euro and the Dollar although gains will probably be muted ahead of the Bank of England rate meeting tomorrow.
