EURO RALLY IS AT RISK OF STALLING
DIRECTOR OF CURRENCY RESEARCH, GFT
IN MAY, at the depth of the Eurozone crisis when the euro was losing value nearly every day, the majority of currency market analysts were convinced that the pair would go to parity or, even worse, that it would collapse altogether. Yet a mere eight weeks later, the euro has gained more than 1,000 points from its lows, rising all the way through the psychologically-important $1.3000 barrier last week.
What’s behind this remarkable turnaround in euro-dollar? The euro bounce is partly due to sentiment extremes. When the speculative markets, such as FX, become too skewed, a counter move inevitably forms, wrong-footing the late entrants. That’s exactly what happened in May when the short euro trade became crowded.
The currency also got a boost after Eurozone fiscal officials implemented a €1 trillion rescue package and made a concerted effort to control their budgets. That calmed the credit markets and, as the bond spreads narrowed, the euro found a base. But the most recent rally was driven not by better risk appetite flows but rather by euro’s long-standing status as the predominant anti-dollar trade.
With US data still disappointing, currency traders have become increasingly dollar averse. The key assumption of most dollar bulls was that the US economy would become the second pillar of growth. That thesis has crumbled as US consumer sentiment fell nearly 10 points last week and spending fell for the second month in a row.
Yet despite the euro’s recent resurgence I believe it could be vulnerable to a pullback this week. Not only is the euro approaching serious technical resistance at the $1.3000-$1.3200 level, it could also face some selling pressure ahead of the bank stress tests on Friday – especially if the assumptions are revealed to be too modest to assuage investor concerns.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected]