EURO’S LUSTRE HAS STARTED TO TARNISH
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
AS THE dollar maintains its fundamentals- driven rally for the second week in a row and US economic data continues to surprise to the upside, the story in the Euro-zone is becoming decidedly murky.
Last week concerns about the fiscal integrity of Greece weighed on the euro and on Monday, the Greek prime minister Andreas Papandreou tried to address some of the issues regarding the widening Greek fiscal deficits that have put the country’s sovereign rating at risk. However, even if Greece manages to get its finances under control, other members such as Spain, Italy and Ireland face a tough year.
In addition to the worries on the fiscal front, the euro could see further weakness if European economic data starts to disappoint. The rebound in the 16-member union has been remarkably resilient this year, despite the appreciation of its currency. However, as 2010 approaches, the disadvantages of a high euro-dollar exchange rate may finally be starting to weigh on growth. The latest report on industrial production for October saw the first monthly contraction since April, suggesting that the sector will not contribute to fourth quarter GDP growth.
While the main event in the forex market will be today’s FOMC meeting, the more important release could come on Friday when the German survey of business sentiment is released. The market is expecting a slight improvement to 99 from the previous month’s reading of 98.9. But if it disappoints, it could signal that the Eurozone economic recovery is running out of steam.
After failing three times at the $1.5000 level over the past few months, euro-dollar now appears unlikely to clear that figure before the year-end. If US data continues to impress while Eurozone numbers disappoint, the nascent rally in the dollar could accelerate, with the pair possibly tumbling to $1.4400 in thin holiday trade.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail them at [email protected].